The Measurement and Monitoring of Liquidity (December 2010)

Summary

This is Bermuda Monetary Authority guidance, dated December 2010, explaining how the Authority measures and monitors liquidity for institutions licensed under the Banks and Deposit Companies Act 1999. It complements the Authority's companion paper on Principles for Sound Liquidity Risk Management and Supervision, and sets out the mismatch ladder approach used to assess whether an institution's liquidity is adequate.

• Reporting: Institutions must provide standard data on the maturity structure of their balance sheet and off balance sheet items, normally quarterly, as part of the Prudential Information Return; the Authority may require more frequent submission where concerns arise.
• Mismatch ladder: Assets and liabilities are allocated into six maturity time bands (sight to 8 days, over 8 days to 1 month, over 1 month to 3 months, over 3 months to 6 months, over 6 months to 1 year, and over 1 year) and net mismatches are assessed as a percentage of total deposit liabilities, in all currencies combined and for material individual currencies.
• Individual guidelines: The Authority sets institution specific guidelines, as a percentage of total deposits, for overall mismatch in the two shortest bands (sight to 1 week and 8 days to 1 month); these are monitoring guidelines rather than hard limits, but repeated breaches trigger supervisory discussion.
• Treatment of liabilities: Liabilities are included according to earliest contractual maturity, with demand liabilities reported in full in the first band subject to an agreed behavioural adjustment, firm commitments included at full value, and contingent liabilities generally excluded unless likely to be triggered.
• Treatment of assets: Assets are generally included according to latest contractual maturity, net of specific provisions, excluding overdue, non performing, and pledged or collateral assets, with specific agreed treatment for overdrafts, standby facilities, highly liquid marketable securities, and repo or stock lending positions to avoid double counting.
• Scope of reporting: Reporting normally applies on a solo (licensed entity) basis, but the Authority may agree with an institution to extend the scope of monitoring and reporting beyond the licensed entity, for example where there are group funding links.

The precise scope of an institution's liquidity policy and reporting framework, as well as its individual mismatch guidelines, is agreed case by case between the institution and the Authority.

Key obligations

• Licensed institutions must maintain adequate liquidity as required under the minimum licensing criteria of the Banks and Deposit Companies Act 1999.
• Institutions must submit standard maturity structure data on balance sheet and off balance sheet items to the Authority, normally quarterly, via the Prudential Information Return.
• Institutions must submit liquidity data more frequently if required by the Authority where particular issues or concerns arise.
• Institutions must allocate assets and liabilities to maturity time bands using a cautious, worst case basis consistent with the Authority's mismatch ladder methodology.
• Institutions must observe individually agreed mismatch guidelines for the two shortest maturity bands and engage with the Authority if they have repeated difficulty staying within those guideline levels.
• Institutions must agree with the Authority on treatment of specific items such as behavioural adjustments, undrawn facilities, overdrafts, and highly liquid marketable securities within the mismatch framework.

Applies to

banks, deposit companies, institutions licensed under the Banks and Deposit Companies Act 1999

Deadlines

• normally on a quarterly basis: Institutions report standard maturity structure data to the Authority as part of the Prudential Information Return