Principles for Sound Liquidity Risk Management and Supervision (December 2010)

Summary

This BMA policy paper sets out 17 Principles for Sound Liquidity Risk Management and Supervision, closely modelled on the Basel Committee's 2008 liquidity principles. It applies to institutions licensed under the Banks and Deposit Companies Act 1999, both individually and on a group consolidated basis, and is intended to be read alongside the Authority's October 2010 paper on measuring and monitoring liquidity.

• Board and senior management: The board must set and approve the bank's liquidity risk tolerance and review liquidity strategy, policies and practices at least annually; senior management must implement the strategy and report regularly to the board.
• Liquidity risk framework: Banks must maintain a robust liquidity risk management framework, including a cushion of unencumbered high quality liquid assets, cash flow projections across time horizons, stress testing and contingency funding plans.
• Pricing and incentives: Liquidity costs, benefits and risks must be incorporated into internal pricing, performance measurement and new product approval processes.
• Governance and controls: Adequate internal controls, independent risk oversight and internal audit review of the liquidity risk framework are required.
• Supervisory role: The Authority will regularly and comprehensively assess banks' liquidity frameworks, require formal periodic reporting, intervene with remedial action where deficiencies are found, and cooperate with other home/host supervisors.

Implementation of the principles may be tailored to a bank's size, business nature and complexity, but institutions choosing to tailor must be able to justify this to the Authority. The Authority notes these principles supplement, rather than replace, the regulatory minimum liquidity standards.

Key obligations

• Establish a robust liquidity risk management framework commensurate with the bank's size, nature and complexity, including maintaining a cushion of unencumbered, high quality liquid assets
• Board of directors must set the bank's liquidity risk tolerance and review liquidity strategy, policies and practices at least annually
• Senior management must develop, implement and continuously monitor a liquidity risk strategy consistent with the board-approved risk tolerance and report regularly to the board
• Incorporate liquidity costs, benefits and risks into internal pricing, performance measurement and new product approval processes for all significant business activities
• Maintain a sound process for identifying, measuring, monitoring and controlling liquidity risk, including comprehensive cash flow projections across appropriate time horizons
• Conduct stress testing and maintain contingency funding plans appropriate to the institution
• Provide the Authority with an explanation of the level of liquidity risk the board has decided the bank should assume, and be prepared to justify any tailored implementation of the principles
• Comply promptly with any remedial action timetable set by the Authority where liquidity risk management deficiencies are identified

Applies to

deposit taking institutions licensed under the Banks and Deposit Companies Act 1999, banks, banking groups subject to consolidated supervision by the Authority

Deadlines

• at least annually: The board of directors must review and approve the bank's liquidity risk management strategy, policies and practices at least annually