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  • Allocation of Liquidity Costs, Benefits and Risks

    • LM-1.3.3

      Senior management must appropriately incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval processes, thereby aligning the risk-taking incentives of individual business lines with the liquidity risk tolerance established by the Board.

      August 2018

    • LM-1.3.4

      Senior management must ensure that the liquidity pricing framework involves the charging of a liquidity premium to activities that consume liquidity (e.g. granting new advances) and the assignment of a liquidity value to those that generate liquidity (e.g. obtaining new deposits), based on a predetermined mechanism for attributing liquidity costs, benefits and risks to these activities. The following considerations, at a minimum, must be factored into the framework:

      (a) The framework must reflect the level of liquidity risk inherent in a business activity;
      (b) The framework must cover all significant business activities, including those involving the creation of contingent exposures which may not immediately have a direct balance sheet impact;
      (c) The framework must incorporate the measurement and allocation process factors related to the anticipated holding periods of assets and liabilities, their market liquidity risk characteristics and any other relevant factors, including the benefits from having access to relatively stable sources of funding, such as some types of retail deposits;
      (d) The framework must take account of both contractual maturity, as well as behavioural patterns in estimating the length of tenor of any relevant asset or liability item for the determination of the liquidity value or premium to be allocated;
      (e) The framework must provide an explicit and transparent process, at the line management level for quantifying and attributing liquidity costs, benefits and risks; and
      (f) The framework must include consideration on how liquidity would be affected under stressed conditions.
      August 2018

    • LM-1.3.5

      Senior management must review periodically the liquidity pricing framework, taking into account changes in business and financial market conditions.

      August 2018

    • LM-1.3.6

      Senior management is also responsible for:

      (a) Communicating the liquidity risk management strategy, key policies and procedures, liquidity pricing framework and liquidity risk management structure to all relevant business units and personnel throughout the organisation, that conduct activities with an impact on liquidity;
      (b) Ensuring that there are close communication links between treasury, liquidity risk managers and other business and risk managers having access to critical information that affects liquidity;
      (c) Ensuring that liquidity risk managers have sufficient authority and independence from risk-taking units to discharge their function effectively;
      (d) Ensuring that adequate internal controls are executed by independent personnel with the necessary skills and competence to safeguard the integrity of the bank's liquidity risk management process;
      (e) Closely monitoring the current trends and potential market developments that may require timely changes or updates to the liquidity risk management strategy, systems and internal controls to address any significant challenges;
      (f) Defining the specific process for handling exceptions to policies and limits, including the procedures for escalation, reporting and consideration of follow-up actions;
      (g) Ensuring the effectiveness of stress tests and contingency funding plans, as well as the appropriateness of the liquidity cushion maintained; and
      (h) Informing the Board of any new and emerging liquidity concerns, through regular and ad hoc submission of risk management reports and risk analysis, in a timely manner.
      August 2018