LM-1 LM-1 Governance of Liquidity Risk Management
LM-1.1 LM-1.1 Liquidity Risk Management Framework
LM-1.1.1
Banks must establish a robust liquidity risk management framework, which includes an asset and liability management committee (ALCO). The framework must describe the role of ALCO and its relationship with the risk management function, and articulate the delineation of powers, responsibilities and reporting lines for different departments and levels of management, so that the liquidity risk management strategy, policies and procedures are implemented effectively.
August 2018LM-1.1.2
A bank's liquidity risk management structure must be commensurate with the nature, scale and complexity of the bank's business activities.
August 2018LM-1.2 LM-1.2 Responsibilities of Board of Directors
LM-1.2.1
The Board must be ultimately responsible for determining the types and magnitude of liquidity risk that the bank can tolerate according to the liquidity risk management strategy, and for ensuring that there is an appropriate organisation structure for managing liquidity risk.
August 2018Liquidity 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 2018Liquidity Risk Management Structure Oversight
LM-1.2.6
The Board of Directors must ensure that any authority that is delegated to the bank's ALCO to carry out some of its responsibilities for liquidity risk management is adequately executed. However, such delegation of authority does not absolve the Board and its members from their risk management responsibilities and the need to oversee the work of any such committee(s) exercising delegated authority.
August 2018LM-1.2.7
For the ALCO, or any similar committee, to perform a liquidity risk governance function on behalf of the Board effectively, its membership should be extended to comprise personnel from the treasury function, the risk management function, the financial control function and other principal business areas that affect the bank's liquidity risk profile. It should also be supported by competent risk managers with a dedicated responsibility for liquidity risk management.
August 2018LM-1.2.8
In the case of a local banking group with overseas operations (whether in the form of a branch or subsidiary), the Board must determine the appropriate liquidity risk management framework for overseeing all such overseas operations, taking into account the differences in their liquidity risk characteristics and the transferability of funds between them in the light of any potential legal, regulatory or operational restrictions.
August 2018LM-1.2.9
In the case of foreign bank branches in Bahrain, the head office of the bank may, where appropriate, delegate certain tasks for liquidity risk management to the local branch management, provided that adequate oversight is exercised by the bank's Board (or a delegated risk governance function at the head office or regional level) in approving the branch policies and monitoring the branch's compliance with such policies.
August 2018LM-1.2.10
The Board of Directors is also responsible for:
(a) Ensuring the competence of senior management and appropriate personnel in measuring, monitoring and controlling liquidity risk in terms of expertise, systems and resources, and in taking appropriate and prompt remedial actions to address concerns when necessary;(b) Reviewing and approving, on an annual basis at least, the liquidity risk strategy and other significant liquidity risk management policies and procedures (e.g. contingency funding planning and liquidity stress testing framework), and ensuring that senior management translates the Board's decisions into clear guidance and operating processes (e.g. in the form of controls) for effective implementation;(c) Reviewing regular reports and stress testing results on the bank's liquidity positions and becoming fully aware of the bank's performance and overall liquidity risk profile; and(d) Understanding, supported bysenior management of the bank, how other risks (e.g. credit, market, operational and reputation risks) interact with liquidity risk and affect the overall Liquidity Risk Management Strategy, ensuring that the interaction of these risks is considered and taken into account by the relevant Board-level committees and Risk Management function within the bank.August 2018LM-1.3 LM-1.3 Responsibilities of Senior Management
Liquidity Risk Management, Strategies and Procedures
LM-1.3.1
Senior management must be responsible for developing and implementing the bank's liquidity risk management strategy, policies and procedures, properly documented in the form of a policy statement, in accordance with the risk tolerance established by the Board. The policy statement must be approved by the Board.August 2018LM-1.3.2
A bank must develop its liquidity policy statement taking into account of the nature of its business activities and liquidity needs under both normal and stressed conditions. A bank's liquidity policy statement must cover, at a minimum, the following key aspects:
(a) Liquidity risk appetite and tolerance established by the Board;(b) Liquidity risk management strategy, including the goals and objectives underlying the strategy; the composition and maturity of assets and liabilities; the level of diversity and stability of funding targeted by the bank; the approach to managing liquidity in different currencies, across borders, and across business lines, products and legal entities, where applicable, taking into consideration the home and host regulatory requirements in the jurisdictions in which the bank operates; the approach to intraday liquidity management; the assumptions on the liquidity and marketability of assets;(c) Liquidity risk management responsibilities, with clearly defined lines of authority, responsibilities and reporting structure;(d) Liquidity risk management systems and tools for measuring, monitoring, controlling and reporting liquidity risk, including the setting of various liquidity limits and ratios; the framework for conducting cash-flow projections and liquidity stress testing, including the techniques, scenarios and assumptions used; and the management reporting system for liquidity risk; and(e) Contingency funding plan, which must describe the approaches and strategies for dealing with various types of liquidity stress.August 2018Allocation 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 2018LM-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 2018LM-1.3.5
Senior management must review periodically the liquidity pricing framework, taking into account changes in business and financial market conditions.August 2018LM-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 2018Independent Reviews
LM-1.3.7
[This Paragraph was deleted in January 2022].
Deleted: January 2022
August 2018LM-1.3.8
The independent reviews of the liquidity risk management framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:
(a) The adequacy of internal systems and procedures for identifying, measuring, monitoring and mitigating liquidity risk;(b) The appropriateness of various internal limits on liquidity metrics for controlling liquidity risk;(c) The suitability of the underlying scenarios and assumptions for conducting cash flow analysis;(d) The integrity and usefulness of management information reports on liquidity risk; and(e) The adherence to established liquidity risk strategy, policies and procedures.Amended: January 2022
August 2018LM-1.3.9
[This Paragraph was deleted in January 2022].
Amended: January 2022
August 2018
