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2012-05-09 16:27:37

Principles for Sound Liquid Risk Management & Supervision
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  1. Principle 5
    • A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting CF arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons
    • Liquidity needs depend on business & product mix, bal sheet structure, CF profiles of its obligations
    • Include liq risk position for future CF, contingent liq demands, currencies, custody & settlement activites
    • Early indicators: rapid asset growth, growing concentrations in A/L, incr in currency mismatch, negative publicity, cr rating downgrade
  2. Principle 6
    A bank should actively monitor and control liq risk exposures and funding needs within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity
  3. Principle 7
    A bank should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships w funds provider to promote effective diversification of funding sources. A bank should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of funds raising capacity remain valid
  4. Principle 9
    A bank shoud actively manage its collateral positions, differentiating between encumbered and unencumbered assets. A bank should monitor the legal entity and physical location where collateral is held and how it may be mobilized in a timely manner
  5. Principle 10
    A bank should conduct stress tests on a regular basis for a variety of short term and protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that current exposure remain in accordance w established liq risk mgt strategies, policies, and positions to develop effective contingency plan
  6. Sources of illiquidity for banks
    • securitization: long process, may not be able to transfer A
    • complex financial instruments: not actively traded, short history, usually have cr downgrade clauses
    • collateral usage: may be asked to post coll short notice
    • payments systems: now intra-day
    • cross border flows: liq disruption may pass quickly across diff mkts
  7. Lessons from 2008 fin crisis
    • stress testing: account for wider disruptions
    • contingency funding plans: must be avail in stress scenario
    • cross border issues: location of liq is relevant
    • central bank: borrowing from it seen as bad sign
    • off bal sheet activities: must be included
  8. Basel Principles Summary
    • Principle 5: controll liq risk based on robust framework
    • Principle 6: across entities, LOBs, currencies
    • Principle 7: solid funding sources
    • Principle 9: manage collaterals incl location
    • Principle 10: stress tests