Liquidity Risk Tolerance
LM-1.2.2
The Board of Directors must articulate the bank's liquidity risk appetite and tolerance that is appropriate for its business strategy and ensure that it is communicated to all levels of management.
August 2018LM-1.2.3
The risk tolerance level must be adequately documented and articulated, preferably with a combination of qualitative and quantitative factors1 .
1 For example, the specification of a minimum survival period under a range of sufficiently severe, but plausible, stress scenarios. Other quantitative measures may, for example, relate to controls over areas such as liquid asset holdings, maturity or currency mismatches, concentration of funding and contingent liquidity obligations, and other limits on liquidity indicators used for controlling different aspects of liquidity risk.
August 2018LM-1.2.4
The risk tolerance must be set in a way that:
(a) Defines clearly the level of liquidity risk that the bank is willing to assume, under normal and stressed conditions2 ;(b) Can be easily communicated, understood and monitored by relevant personnel of the bank involved in the liquidity risk management process; and(c) Reflects the bank's assessment of the sources of liquidity risk it faces, as well as the trade-off between risks and profits.
2 For example, a bank may quantify its liquidity risk tolerance in terms of the level of unmitigated funding liquidity risk the bank decides to take under normal and stressed business conditions.
August 2018LM-1.2.5
Banks must also constantly monitor its risk profile for adherence to the risk appetite and tolerance, ensuring that any significant changes in market circumstances or the validity of assumptions used are accounted for.
August 2018
