• LM-4 LM-4 Funding Diversification and Market Access

    • LM-4.1 LM-4.1 Overview

      • LM-4.1.1

        To ensure a reliable supply of funds, both in normal times and during stressed conditions, banks must, to the most practicable extent, maintain a range of diversified and stable funding sources (including liquid assets held) to meet liquidity needs for various time horizons, supported by their ready access to the relevant markets. Banks must also take appropriate measures to foster relationships with fund providers and strengthen their presence in funding markets.

        August 2018

    • LM-4.2 LM-4.2 Funding Diversification

      • LM-4.2.1

        Banks must establish an effective funding strategy to achieve sufficient diversification, both of their funding sources and in the composition of their liquid assets. A bank's funding strategy must consider correlations between sources of funds and market conditions.

        August 2018

      • LM-4.2.2

        Banks must put in place concentration limits on liquid assets and funding sources, as appropriate, with reference to such characteristics as the type of asset, product, market or instrument; nature of issuer, counterparty or fund provider; maturity; currency; geographical location and economic sector.

        August 2018

      • LM-4.2.3

        Banks must maintain an appropriate mix of liquid assets (including the type and quality of assets, and level of such holdings) as a source of liquidity for day-to-day operational needs (e.g. for settlement and clearing purposes), as well as for meeting emergency funding needs.

        August 2018

      • Other Funding Sources

        • LM-4.2.4

          Banks must assess their exposure to significant funding providers (or depositors) on an ongoing basis. For this purpose, banks must have in place, as part of their MIS, regular reports on the funding received from significant funding providers to facilitate monitoring. Such reports must consolidate all funding that a bank obtains from each significant funding provider (including a group of related funding providers which, when aggregated, amount to a significant funding provider). The historical amount of funds provided by these funding providers, e.g. in terms of the maximum, minimum and average balances over the previous 12 months, must also be monitored. Trigger ratios must be established to identify any funding concentration for management review. In the case of a retail bank, a funding concentration may exist if a significant percentage of its total deposit base is from a limited number of the top-ranking depositors or a single depositor (or group of related depositors). Banks must consider appropriate actions to diversify the deposit base.

          August 2018

        • LM-4.2.5

          Banks must avoid any potential concentration in their reliance on particular funding markets and sources. Banks must take into account the following major factors in assessing the degree of funding concentration:

          (a) The maturity profile and credit-sensitivity of the liabilities;
          (b) The mix of secured funding and unsecured funding;
          (c) The extent of reliance on a single fund provider or a group of related fund providers; particular markets, instruments or products (e.g. interbank borrowing, retail versus wholesale deposits, and repo agreements and swaps); and intragroup funding;
          (d) Geographical location, industry or economic sector of fund providers; and
          (e) The currency of funding sources.
          August 2018

        • LM-4.2.6

          Banks with a large deposit base must, in particular, conduct more granular analysis on the stability of different types of deposits taking into account the relevant contractual and behavioural characteristics of such deposits (e.g. in terms of deposit insurance coverage, currency denomination, nature of depositors, such as retail, wholesale or private banking customers, etc.). They must monitor the trends and levels of their stable deposits regularly.

          August 2018

        • LM-4.2.7

          Banks must identify alternative sources of funding (e.g. intragroup funding, new debt issues, asset sales, etc.) that may be used to generate liquidity in case of need, and review the effectiveness of using such sources in different situations. However, they must be aware that not all fund-raising options are available in all circumstances and some may be available only with a substantial time delay.

          August 2018

    • LM-4.3 LM-4.3 Market Access

      • Market Presence

        • LM-4.3.1

          Banks must maintain an active presence in markets relevant to their funding strategy. This requires an ongoing commitment and investment in adequate and appropriate infrastructures, processes and information systems. To ensure their access to funding markets in a timely manner, banks must periodically utilise the established systems, documentation and arrangements for accessing those markets to confirm whether willing counterparties are readily available.

          August 2018

        • LM-4.3.2

          The ability to obtain funds in the interbank market is an important source of liquidity for banks. Banks should be in a position to estimate their 'normal' borrowing capacity, based on past experience, and aim to limit their wholesale funding needs for both local and foreign currencies.

          August 2018

      • Relationship with Market Providers

        • LM-4.3.3

          Banks must identify and build strong relationships with funding providers. In particular, banks must maintain a solid and close relationship with its 25 largest depositors on an ongoing basis, to ensure that the bank has the ability to obtain funds in case of need (e.g. during events of stress), to prevent and/or limit a bank run-off and to safeguard its major sources of funding. Nevertheless, banks must take a prudent view of how such relationships may be strained in times of stress. In the formulation of stress scenarios and contingency funding plans, banks must take into account possible situations where funding sources, including its 10 largest depositors, may dry up and markets may close, and where market perceptions of a bank's financial position may change.

          August 2018