• 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