LM-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 2018
