Department Of Accounting & Information Systems

Presentation on Theory and Practices of Banking and Insurance

Topic: Bank Liquidity Risk Management

Presented to: Maksuda BegumLecturer, Department of AIS

Presented By:Group: DynamicGroup no: 3Group Leader: Sakib Ahmed Anik

Name Roll NoMd. Kawser Ahmed B-130201097Sakib Ahmed Anik B-130201022Md. Jashim Uddin B-130201101Piarul Islam B-130201102Afia Washima B-130201064Tanay Datta B-130201065Md. Asad B-130201030Gopal Karmaker B-130201108Md. Ashraful Islam B-130201017Shariful Islam B-130201079Sagir Mahbub B-130201124

Group Members

Welcome To Our

Presentation

Bank Liquidity Risk

Management

1st Presenter

Md. Kawser HossainId: B-130201097

Topic: Bank liquidity and it’s principles

LIQUIDGenerally, an asset is considered to be liquid if it can be converted into cash easily and immediately, with no loss of value as a result of its

sale.Of course the level of liquidity

changes with market conditions.

Bank Liquidity

In banking, liquidity is the ability to meet obligations when they become due.

The Principles of Bank Liquidity Risk Management

1. Fund illiquid assets with core customer deposits

2. Using long term wholesale funding source

3. Run a sensible term structure of wholesale funding

4. Maintain liquidity buffers5. Establish a liquidity contingency plan 6. Asses the central bank facilities 7. Be ware of all bank’s exposure8. The liquidity risk is an array of metrics9. The internal funding pricing framework

2nd PresenterSakib Ahmed AnikId: B-130201022Topics: The FSA

model, Liquidity Risk Drivers, Liquidity Assessment Report Format

The FSA model of Liquidity Management

The tenets of the FSA regime represent a sound approach to sustainable liquidity management ,and that bank boards and senior management incorporate them into their operating model. The FSA incorporates its approach into an individual liquidity adequacy assessment (ILAA) process.

Liquidity Assessment Report Format

The ILAA asks for: 1. The objective of the report2. The summery of the bank financial statement3. The composition and amount of liquidity4. Description of the bank’s liquidity risk management5. A summery of liquidity risk limits6. Description and actions against the liquidity risk

The Liquidity Risk Drivers

Wholesale Funding RiskIntra-group Funding RiskIntra-day Liquidity RiskCross-currency Liquidity RiskRetail Funding RiskOff-balance Sheet Liquidity RiskFranchise Viability Liquidity RiskMarketable Asset Risk

3rd Presenter

Md. Jashim UddinId: B-130201101

Topics: Bank Liquidity Policy statement and it’s structure

The Bank Liquidity Policy Statement

The liquidity policy Statement is designed to be a regularly updated, go-to-working document, as well as part of the bank’s governance structure.

….The ability to ensure the bank will always be able to maintain or generate sufficient cash resource to meet its payment obligation in full as they fall due, on acceptable terms, under all market conditions.

The Objectives of Liquidity Policy

Set out the bank’s policy for measuring monitoring and managing liquidity risk

Set out how to the bank govern its tolerance or appetite for liquidity risk

Set out arrangement for the approval and review of liquidity policies and procedures

Document the bank policy for managing intra-day liquidity risk related to collateral cash flows

Liquidity Risk Definition

Sources of liquidity Risk

Short-term Liquidity

Structural Liquidity Reporting Stress Testing Contingency

Plan

Management Principles

Management Principles

Measurement & Management

Measurement & Management

Operative Limits/Liquidity

Buffer

Structural Limits

Annual Funding Plan Process

Internal Funding Pricing Policy

Liquid Asset Buffer

Decision Making and Communication Process

Early Warning indicators

Trigger events and process

Figure: Liquidity Policy Structure

4th Presenter

Piarul IslamId: B-130201103

Topics: Risk Management Governance Structure

Board of Directors

ExCo

ALCO

Risk

Treasury

Finance

Figure: Risk Management Governance Structure

Bank Boards• Responsible for Liquidity

ManagementALCO• Responsible for structural and

operational liquidity managementCRO• Responsible for carries out stress

testingHead of Treasury• Responsible for carries out day to

day operational liquidity management

Head of Finance • Responsible for carries out reporting

and limit monitoring for regulatory and management purpose

5th Presenter

Afia WashimaId: B-130201064

Topics: Liquidity Policy Standards, ALCO Governance

Liquidity Policy Standards

Policy statements are often augmented by policy standards, which may be used to keep the statement up-to-date.

The liquidity policy statement is to describe in explicit terms how the bank’s liquidity and funding policy should be applied.

Objectives To ensure that liquidity stress for the bank is

maintained within a manageable range to ensure continuous liquidity

To ensure that funding arrangements are maintained to enable assets to be funded through to maturity

To ensure that the bank operates to all required liquidity limits of the national regulator

To identify explicitly, via the bank’s internal funds pricing policy (or “Funds Transfer Pricing” policy), the cost of liquidity for the bank, and to ensure that this cost is understood by the business lines and feeds correctly into the bank’s asset origination process

To ensure that liquidity risk reporting is carried out to an acceptable standard

Liquidity Policy Statement : Banking Group

A liquidity policy statement adopted at a banking group will cover the requirements necessary for operation in a multi-jurisdictional environment.

The governance structure for a group entity presents problems in control and monitoring.

The ALCO governance structure follows the regional arrangement of the group’s Treasury desks.

Group Board of Directors

Group ALCO

Group Treasury

Subsidiary Subsidiary

ALCO ALCO

Branch

Liquidity Hub

Liquidity Hub

Local entity

Local Entity

Local Entity

Local Entity

Figure: Bank Group ALCO governance Structure

Stress testing

Collateral management

Pricing of liquidity risk

Group funding plan

Group liquidity buffer

Group limits

Liquidity risk policy

The roles and responsibility of the Group ALCO will include:

6th Presenter

Tanay DattaB-130201065

Topics: Policy on Intra-group lending

Policy on Intra-Group Lending (IGL)

Intra-group lending (IGL) is a significant driver of liquidity risk exposure in a banking group and it’s important to address it, at group level, in the liquidity policy statement.

IGL Coverage

An IGL is a limit is recorded to cover any credit equivalent exposure that arises between two connected counterparties and across legal entities within a banking group.IGL covers a number of different exposures, including • Funding• Overdrafts • Operational facilities• Guarantees• Letter of Credit• Derivatives

7th Presenter

Md. AsadId: B-130201030

Topics: Liquidity Asset Buffer (LAB), LAB cost allocation, LAB portfolio size.

Securities in the LABA bank’s LAB should be composed of cash and high-quality sovereign securities only.

A conventional commercial bank that operates within its home country only, this suggests that the LAB would be its own government bond only.

As a bank expands into business lines in other currencies, this suggests that an expansion into other country sovereign bonds.

The UK FSA suggests that the LAB for most banks in Western jurisdictions would be expected to be comprised of the following—

Highly liquid, high-quality of government debt instruments such as gilts, plus bonds issued by the countries of the European Economic Area (EEA), Canada, Japan, Switzerland, USA

Reserves held with the bank of England’s reserve scheme and with the central bank of U.S.

LAB Cost AllocationThe opportunity cost approach to calculating the running cost of maintaining the LAB require an element of subjectivities. Another approach is to take the asset swap returns which is a floating spread of over Libor.

AssetsLENDING

LoansMortgageesOverdrafts

Trading book assetsEtc.

Liabilities

Funding Capital

Customer DepositsMTNsetc.Liquid Asset Buffer

(LAB)Cost

of M

aint

enan

ce Cost of Funding

Funding Cost Transfer

Figure: LAB cost Allocation

8th Presenter

Gopal KarmakerId: B-130201108

Topics: Collateral management, Collateral Organization

Collateral Management

Collateral Management policy should ensure that an increased demand for collateral does not take a bank by surprise, or become unmanageable.

The key consideration for collateral management policy are:

Ensure that policy and control is exercised centrally for the bank, and not separately for different business lines.

Maximize the ability to net margin calls with counterparties

Apply general risk management consideration

Collateral Organization The “ownership” of collateral is a political red-herring for bank

management. While individual business lines may acquire the assets that can be used as collateral.Bellow figure shows how eligible securities may be organized across business lines, such as individual business areas; Treasury desk (including Repo desk)

Business lines

Repo desk

CSA

Liquid asset buffer

Term secured funding

Repo counterpart

y

Counterparty

Figure: Collateral sources and usage

9th Presenter Md. Ashraful

IslamB-130201017

Topics: Contingency Funding Plan, Alternative Funding Plan

THE CONTENGENCY FUNDING PLAN (CFP)

In some jurisdictions, a liquidity CFP is a requirement of the regulator. Irrespective of whether this is case or not, business best-practice dictates that a bank should have a CFP in place as part of its liquidity risk management process. Setting the CFP: The CFP must contain detailed information about the actions to be taken, and the alternative sources to be accesses. Essentially the CFP should be set out:• The range of viable, readily available and flexible

deployable• An estimation of the amounts of funds that can be obtained

from different potential contingency funding sources• Clear and effective governance structure, policies and

producers• Appropriate communication plans• The steps to be followed to meet critical payments on an

intra-day basis in stress situations• A framework under senior management board

Alternative Funding Sources Market observation suggests that it is the newer resources of funds that are the most unstable during a liquidity crisis. Given this fact, it is important for banks to have alternative funding resources available, and include them in the CFP.

The sources of alternative funding might be include:

• Internet based deposits, including via internet brokers• CD and CP/ECP issuance programmes• Credit unions• Increasing the number of branches, wider liability-rising ability• A “liquid option facility”• Sovereign wealth funds• Foreign central bank reserves

10th Presenter

Shariful IslamB-130201079

Topics: Liquidity Risk Metrics

LIQUIDITY RISK MATRICSThe point of calculating and reporting

liquidity risk metrics is to enable senior management to have the most accurate, and up-to-date, estimation of the liquidity exposure of the bank at any time.

• Loan-to-deposits ratio• 1-week and 1-month

liquidity ratios • Cumulative liquidity model• Liquidity risk factors• Concentration and funding

source report• The inter-entity lending

report

Six Key

Liquidity

Metrics

Loan-to-Deposit (LTD)This is the standard and commonly used metric, typically reported monthly.

1-week and 1-month Liquidity RatiosThese are the standard liquidity ratios that are commonly measured against a regulatory limit requirement.

Cumulative Liquidity ModelThis is an extension of the liquidity ratio report and is a forward-looking model inflows, outflows and available liquidity, accumulate for a 12-month period.

Liquidity Risk Factors The liquidity risk factor (LRF) measures is a static snapshot that the aggregate size of the liquidity gap: it compares the average tenor of assets to the average tenor of liabilities

Concentration Report and Funding Source ReportThis report shows the extent of reliance on single sources of funds.

Inter-entity Lending ReportThis report is relevant for Group and consolidated banking entities.

11th Presenter

Sagir MahbubB-130201124

Topics: Strategic Level Liquidity Metrics, Liquidity Coverage Ratio, The Net Stable Funding Ratio, Long Term Liquidity Limits

High-level liquidity metrics are part of the strategic management of structural liquidity, to ensure that there is a balanced and stable liquidity profile over the medium and long term, while interacting efficiently with short-term liquidity management.

Strategic Level Liquidity Matrics

Liquidity Coverage RatioThe LCR metric promotes short-term resilience to liquidity shocks; setting a limit for it ensure that sufficient high quality liquidity assets are maintained to offset cash outflows in a stressed environment. Stock of high-quality liquid assets/Stressed net cash outflows over a 30 day time period >100%

The Net Stable Funding Ratio

A significant aspect of Bessel 3 is anew liquidity measurement metric known as the net stable funding resilience over the longer term ; setting a limit a limit for it ensures that sufficient long-term funding is in place to support the bank’s balance sheet. The ratio aims to “Promote more medium and long term funding of the asset and activities of banking organization”Available stable funding / Required stable funding > c. 100%

Long Term Liquidity Limits

The structural liquidity profile should be stable and balanced over time , assuming al financing constraints are consistent with the maturity transformation limits desired by the bank. By setting long-term limits , a bank will be aware when these approach a critical warning level. Ratio between liabilities/ asset over 1 year> 98% Ratio between liabilities/ asset over 3 year> 85% Ratio between liabilities/ asset over 5 year > 70%

Specifying The Lequidity Risk Appetite

The lequidity risk appetite is an extract from the liquidity policy statement of a medium –sized UK commercial banking institution . IT articulates the liquidity risk appetite that the bank follows. This is an important part of liquidity and ALM risk managent.Funding liabilities (total liabilities – capital) Cutomer deposits (Private customer deposits+corporate customer deposits+ financial customer deposits)Private customer deposits(Deposit from private customers that behave in line with FSA description )Funding source(Coumterparties with similar characteristics)Liquid currencies(USD, EUR, GBP, JPY, CAD, SEK, NOK, DKK, CHF, AUD NZD)

Thank You All Edited,

designed and written by

Anik