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  • LM-2.1 LM-2.1 Liquidity Metrics and Measurement Tools

    • LM-2.1.1

      A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.

      August 2018

    • LM-2.1.2

      Banks must use a range of liquidity metrics for identifying, measuring and analysing liquidity risk. These metrics must enable the management to understand its day-to-day liquidity positions and structural liquidity mismatches, as well as its resilience under stressed conditions. In particular, these metrics must perform the functions of:

      (a) Ensuring compliance with statutory liquidity requirements;
      (b) Projecting the bank's future cash flows and identifying potential funding gaps and mismatches under both normal and stressed conditions over different time horizons;
      (c) Evaluating potential liquidity risks inherent in the bank's balance sheet structure and business activities, including the liquidity risks that may arise from any embedded options and other contingent exposures or events;
      (d) Assessing the bank's capability to generate funding, as well as its vulnerability to, or concentration on, any major source of funding;
      (e) Identifying the bank's vulnerabilities to foreign currency movements; and
      (f) Identifying market related information.
      August 2018

    • LM-2.1.3

      The above must take into account all assets, liabilities, off—balance sheet ('OBS') positions and activities of the bank, across business lines, legal entities and overseas operations in a timely and effective manner.

      August 2018

    • LM-2.1.4

      Banks must use metrics and tools that are appropriate for their business mix, complexity and risk profile. In addition to liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), the following liquidity indicators must be monitored:

      (a) Maturity mismatch analysis, based on contractual maturities, as well as behavioural assumptions of cash inflows and outflows. Such metrics provide insight into the extent to which a bank engages in maturity transformation and identify potential funding needs that may need to be bridged;
      (b) Information on the level of concentration of funding from major counterparties (including retail and wholesale fund providers);
      (c) Major funding instruments (e.g. by issuing various types of securities);
      (d) Information on the size, composition and characteristics of unencumbered assets included in a bank's liquidity cushion for assessing the bank's potential capacity to obtain liquidity, through sale or secured borrowing, at short notice from private markets or CBB in times of stress; and
      (e) LCR in individual currencies.
      August 2018

    • LM-2.1.5

      In addition to the above, banks should adopt other metrics, as considered prudent or necessary to supplement their liquidity risk management, such as:

      (a) Medium-term funding ratio3, stable or core deposit ratio, or any similar ratio that reflects the stability of a bank's funding;
      (b) Financing-to-deposit ratio, or any similar ratio that reflects the extent to which a major category of asset is funded by a major category of funding4; and
      (c) Metrics tracking intragroup lending and borrowing.

      3 A medium-term funding ratio is a ratio of liabilities to assets, both with a contractual maturity of, say, more than 1 year. This ratio focuses on the medium-term liquidity profile of a bank and is intended to highlight the extent to which medium-term assets are being financed by the roll-over of short-term liabilities.

      4 A bank, depending on its business profile, may decide to adopt different breakdowns of the financing-to-deposit ratio such as, by way of example: financing to retail customers / retail customer deposits; financing to corporate customers / corporate customer deposits; financing / retail (or corporate) customer deposits. To complement the analysis provided by these indicators, the bank may consider assessing other funding risk indicators such as customer deposits / total liabilities or deposits from credit institutions / total liabilities to provide a notion of the bank's funding profile and take a closer look at the share of wholesale funding. Depending on its foreign activities and the related relevance, the bank may decide to assess the share of deposits in non-domestic markets.

      August 2018

    • LM-2.1.6

      Banks must regularly analyse information or trends revealed from liquidity metrics (e.g. a persistent decline in stable deposits) to identify any material liquidity concerns.

      August 2018