MARAYO BANK INC.

(A RURAL BANK)
Liquidity Risk Management Manual
Approved per Board Resolution No. ______ dated ________

CHAPTER I
INTRODUCTION

MARAYO BANK, INC. (A RURAL BANK) (MBI) aims to ensure that the organization is
able to maintain a level of liquidity sufficient to readily meet both expected and unexpected cash
flows and collateral needs without adversely affecting daily operations and the financial condition of
the institution.

It is the thrust of MBI to promote the adoption of effective liquidity risk management systems
to ensure a bank’s ability to meet its obligations as they fall due and reduce the probability of an
adverse situation and warrant that it is able to withstand a series of stress events with varying
severities under different time horizons.

This Policy outlines guidelines mandated by the Board of Directors in the identification,
evaluation, measurement, monitoring and reporting of all liquidity risks associated with the financial
activities conducted by the Bank's organization. These guidelines align existing regulations to the
extent possible, with international standards and best practices in the industry.

MBI expects its personnel (e.g., board of directors, senior officers, rank and file) to follow
strictly the fundamental principles in accordance with the policies and guidelines set in this Manual.
This manual also describes the responsibilities of and requirements imposed upon the different
functions of the Bank to fulfil their liquidity risk management duties in order to maintain a safe and
sound financial position.

I. DEFINITION OF LIQUIDITY RISK

Liquidity risk is generally defined as the current and prospective risk to earnings or capital
arising from a bank’s inability to meet its obligations when they come due without incurring
unacceptable losses or costs. Liquidity risk includes the inability to manage unplanned decreases
or changes in funding sources. (MORB Sec. 145, 2017).

Liquidity risk is categorized into two risk types: Funding liquidity risk appears when the Bank
cannot fulfil its payment obligations because of an inability to obtain new funding. Market liquidity
risk appears when the Bank is unable to sell or transform its Liquidity Buffer into cash without
significant losses
The Bank’s Liquidity Risk Management is a decision-making and guiding tool to properly
manage the bank’s cash flow. It focuses on a proactive measure in order to maintain a sufficient
available fund sources at reasonable cost to ensure business continuity.
II. PURPOSE OF LIQUIDITY RISK MANAGEMENT

The Liquidity Risk Management Manual aims to establish the management of Marayo Bank,
Inc.’s Liquidity risks in conformance with Bangko Sentral ng Pilipinas (BSP) Guidelines. This Manual
also addresses the following objectives:

 To identify, measure, control and monitor liquidity risk and to ensure effective reporting
of risk and emerging risk issues to the board of directors.
 To provide certain prudential limits in financial actions of the bank to avoid liquidity
crises.
 To establish a formal contingency funding that clearly sets out the strategies for
addressing liquidity shortfalls in emergency situations.
 To disseminate liquidity risk management policies across all units.
 To assist business units in understanding and evaluating risk for a well-informed decision
making.
 CHAPTER II
OVERSIGHT BODIES
I. ROLES AND RESPONSIBILITIES OF BOARD OF DIRECTORS

Consistent with the principles embodied under Sec. 145 (Specific duties and responsibilities of
the board of directors), the duties and responsibilities of the board of directors in relation to the
effective management of risk include the establishment of a comprehensive and effective liquidity
risk management framework as part of the enterprise-wide risk management system. In this regard,
the board is ultimately responsible for the liquidity risk assumed by the bank and the processes used
to manage it. The board of directors shall:

A. Establish the bank’s tolerance for liquidity risk in a way that:

(1) Defines clearly the level of unmitigated liquidity risk that the bank is willing to assume
under normal and stressed conditions in varying time periods, including intraday, given its
business model, financial condition, and funding capacity.

(2) Can be easily communicated and understood by personnel involved in the liquidity risk
management process; and

(3) Reflects the bank’s evaluation of the sources of liquidity risks and the trade-off
between risks and profits.

B. Approve the bank’s funding strategy.

C. Ensure coherence of the measures used to contain liquidity risk within the stated tolerance
level.

D. Maintain an appropriate structure for day-to-day funds management and the management of
liquidity risk of the bank and its subsidiaries, whenever applicable. The structure should
enable the availability of liquidity and the monitoring of liquidity risks across the banking
group and at each entity on an on-going basis.

E. Ensure that the bank has competent senior personnel and appropriate resources in terms of
expertise and systems to enable the identification, measurement, monitoring and control of
liquidity risk.

F. Monitor the bank’s performance and overall liquidity risk profile in a timely manner by
requiring regular reports. These reports should, at a minimum, contain the liquidity position
of the bank along with information related to compliance with established risk limits, and on
new or emerging liquidity risks.

G. Mandate and track the resolution of breaches in risk limits and actions taken on deviations
from policies and procedures.
II. PRESIDENT AND SENIOR MANAGEMENT

Senior management led by the President/Manager, Ms. Grace F. Escario, shall be responsible
for the effective execution of liquidity strategies and for operating within the liquidity risk tolerance
level set and approved by the board of directors. In this respect, senior management shall:

A. Develop and implement a set of liquidity risk policies and procedures that translates the
board’s goals and objectives into operating standards, and ensure that this is transmitted to
and well understood by personnel.

B. Develop a funding strategy that provides for the effective diversification of assets, funding
sources and maturities, taking into account market conditions and the bank’s ability to access
funds from different sources. A bank should diversify available funding sources in the short-,
medium- and long-term. Diversification targets should be part of the medium- to long-term
funding plans and aligned with the budgeting and business planning process. The funding
strategy should be formally documented and regularly reviewed in light of any changes in the
market environment or key assumptions.

C. Appropriately incorporate liquidity costs, benefits and risks in the internal pricing,
performance measurement and new product approval processes for all significant activities
(both on- and off-balance sheet), thereby aligning the risk-taking incentives of individual
business lines with the liquidity risk tolerance set by the board.

D. Ensure that all business units conducting activities that have an impact on the liquidity profile
are fully aware of the bank’s funding strategies, and operate in accordance with approved
policies, procedures, limits and controls.

E. Adhere to the lines of authority and responsibility that the board has established for
managing overall liquidity risk, and ensure that the units responsible for managing liquidity
risk have sufficient authority and independence from risk taking units to enable them to
discharge their functions effectively.

F. Oversee the implementation and maintenance of management information and other systems
that are used to identify, measure, monitor, and control the bank’s liquidity risk.

G. Closely monitor current trends and potential market developments that may present
significant challenges for managing liquidity risk. These developments and trends shall
include emerging issues, such as increasing funding costs or concentrations, the growing size
of the funding gap, the drying up of alternative liquidity sources, material and/or persistent
breaches of limits, a significant decline in the internal liquidity buffer, or changes in external
market conditions that signal difficulties in the future.

H. Inform the board of any new and emerging liquidity concerns in a timely manner.
 CHAPTER III
ROLES AND FUNCTIONS
LIQUIDITY RISK GOVERNANCE

The Policy is approved by the Board of Directors and regularly reviewed to ensure that it is
aligned with the Bank’s business plan, economic and financial position or any other significant
changes which affect the Bank. The Board of Directors receives regular reports on the liquidity and
funding situation of the Bank.

The President ensures that the Policy is effectively implemented and is responsible for
establishing prudent liquidity risk management and risk control procedures.

The Bank has formulated a contingency plan which will be activated in case the Bank’s
liquidity situation is no longer satisfactory. The President will inform the Board about the activation
of the contingency plan.

I. COMPLIANCE FUNCTION

 Compliance Office shall conduct an independent assessment of the bank's compliance with
relevant laws, rules and regulations, as well as internal policies;

 He/she shall assess whether the identified liquidity risk exposure by the business units or by
the function itself shall affect the liquidity status of the bank. In this regard, it shall advise
and assist management in establishing guidance on the appropriate implementation of
relevant laws, rules and regulations, and internal policies.

II. INTERNAL AUDIT

 Internal audit shall conduct an independent assessment of the liquidity risk management
framework, including the implementation of liquidity risk management policies and
procedures.

 The board of directors, either directly or indirectly through the board-level Audit Committee
shall ensure that the scope and frequency of audit is appropriate to the risk exposures.

 Any liquidity risk issue identified and reported in the audit process should be addressed by
senior management in a timely and effective manner, or raised to the attention of the board
as appropriate.

 Internal Audit reports shall be the subject of review and discussion by the Audit
Committee/Board of Directors, whichever is appropriate, and actions shall be taken on each
of the audit findings.

 The Internal Auditor shall utilize the bank’s audit rating system to determine the level of
satisfaction on each risk area.

 The Internal Auditor shall make follow-ups based on the timelines committed by Bank
Management or imposed by the Audit Committee/Board of Directors.

 Any unresponded or not acted audit findings shall be given higher demerit ratings in the next
audit visit/engagement until such findings shall be fully complied upon.
 CHAPTER IV
LIQUIDITY RISK MANAGEMENT FRAMEWORK
I. RISK IDENTIFICATION AND ASSESSMENT

Below are the internal and external factors in banks that may potentially lead to the
liquidity risk problems.

Internal Banking Factors Internal Banking Factors

High off-balance sheet exposures. Very sensitive financial markets
depositors.
The banks rely heavily on the short-term External and internal economic shocks.
corporate deposits.
A gap in the maturity dates of assets and Low/slow economic performances.
liabilities.
The banks’ rapid asset expansions exceed Decreasing depositors’ trust on the
the available funds on the liability side. banking sector.
Concentration of deposits in the short- Non-economic factors.
term Tenor.
Less allocation in the liquid government Sudden and massive liquidity withdrawals
instruments. from depositors.
Fewer placements of funds in long-term Unplanned termination of government
deposits. deposits.

The business units shall be primarily responsible in identifying and assessing liquidity risk and
report them to the Bank Management.
 II. LIQUIDITY RISK TOLERANCE

The key metric Marayo bank will use to measure and limit liquidity risk is the survival
horizon. The survival horizon measures the time the Bank is able to fulfil all its payment obligations
stemming from ongoing business operations under a severe stress scenario.

The Bank’s target survival horizon is twelve months and the survival horizon shall always
exceed nine months. The Bank uses stress testing to calculate the liquidity requirements
corresponding to different survival horizons.

Figure 1 illustrates the relationship between the Bank’s Liquidity Buffer and the stressed
liquidity requirements corresponding to a survival horizon of nine months ( Minimum Liquidity
Requirement) and to a survival horizon of 12 months (Target Liquidity Requirement).

When the size of the Liquidity Buffer equals the Target Liquidity Requirement, the Bank is
able to fulfil all its payment obligations and continue its business operations without disruptions for
the forthcoming twelve months under a stress scenario.

To secure the fulfilment of short-term payment obligations, such as borrowing repayments

and new loan disbursements, it is required that the forthcoming three months expected net cash
outflows can be met with maturing investments from the Liquidity Buffer.

Figure 1. Stressed liquidity requirements and the size of the Liquidity Buffer

Target Liquidity Requirement =

12 months’ stressed liquidity requirement

Add-on for Minimum Liquidity Requirement =

stressed 9 months’ stressed liquidity requirement
cash flow
Bills

Expected Minimum Cash Requirement =

3 months’ stressed liquidity requirement
Cash Flow

Cash
Stressed Liquidity
Liquidity Buffer
Requirement

In addition, the Bank’s liquidity position should be strong enough to fulfil the minimum
liquidity ratio requirements as specified by the Bangko Sentral ng Pilipinas.

To promote short-term resilience to liquidity shocks, banks shall maintain a stock of liquid
assets proportionate to their on- and off-balance sheet liabilities. A prudential MLR of twenty percent
(20%) shall apply to banks on an ongoing basis absent a period of financial stress. The liquidity ratio
is expressed as a percentage of a bank’s eligible stock of liquid assets to its total qualifying liabilities.
 III. MEASURING LIQUIDITY RISK

The Bank enforces risk management process in order to minimize or avoid losses arising from
the effects of loss events as follows:

A. Stress testing

Stress testing is based on the Bank’s expected cash in- and outflows during the twelve-
month horizon. The Target Liquidity Requirement is then calculated by applying the stress scenario
on the expected cash in- and outflows and the Liquidity Buffer. The stress test captures both
market-wide risk effects.

B. Specification of the stress scenario

The stress scenario is defined by specifying the shock assumptions for cash in- and outflows as
follows
 Existing loan portfolio and disbursements of new loans
The stress scenario assumes a rapid deterioration of the economic environment, causing
disruptions in the expected cash inflows from the Bank’s loan portfolio. It is assumed that all loans
are paid back at their final maturities (no prepayments). In addition, the scenario captures
elevated repayment risk from low-rated counterparties and credit concentration risk related to
expected repayments from large counterparties. The demand for new lending transactions is
expected to remain at the planned level.
 Funding transactions
The funding market is assumed to become completely inaccessible for new funding
transactions and all funding line transactions are assumed to be terminated at the earliest possible
date.
 Assets held in the Bank’s Liquidity Buffer
Valuation haircuts for the assets held in the Bank’s Liquidity Buffer are calculated based on a
steep increase in the level of credit spreads.
 Other cash flows
Remaining cash flows are assumed to be received or paid out according to their contractual
specifications.

IV. MANAGEMENT OF LIQUIDITY RISK

To mitigate the funding liquidity risk, the Bank has established a high-quality Liquidity Buffer
which can be used to meet payment obligations while continuing normal banking activities without
obtaining new funding. The Bank additionally ensures that its funding is diversified and that the
maturity profile does not create significant gaps.

The market liquidity risk is mitigated by having a Liquidity Buffer consisting of high-quality
financial assets that under stressed market conditions maintain its market value. The Bank has at
present no direct access to central bank repo facilities
 V. LIQUIDITY BUFFER

The Liquidity Buffer consists of cash, deposit from banks and money market securities as
well as collections from loan.
The Liquidity Buffer is mainly put in different bank savings account and investments in short
term money markets.
The Bank shall be able to fulfil the expected net cash outflows of the forthcoming three
months from the Liquidity Buffer.
These investments are mainly short-term money market investments and accounts
deposited in high-rated banks.
The rest of the Liquidity Buffer can be invested in fixed-income instruments such as
government bonds, public sector bonds, covered bonds, mortgage bonds and senior unsecured
bonds issued by financial institutions (banks).

VI. ASSET QUALITY

To ensure that the buffer maintains its market value and liquidity under severe market
conditions, the following limits have been set to control the asset quality of the Liquidity Buffer.

- A minimum limit for the proportion of High-Quality Liquid Assets. HQLA refers to an asset
that can be converted easily and immediately into cash at little or no loss of value in private
markets to meet the covered bank’s liquidity needs during times of stress. To qualify as
HQLA, the liquid asset should possess the asset and market liquidity characteristics, and
should satisfy the operational requirements for monetization prescribed under the LCR
standard. HQLAs shall be categorized as either Level 1 or Level 2 assets. The stock of HQLA
makes up the numerator of the LCR. (Appendix 72 of MORB).
- A minimum limit for the proportion of assets eligible as collateral in one or several Banks.

MARAYO BANK, INC. (A RURAL BANK) LIQUIDITY RISK MANAGEMENT MANUAL – APPROVED PER BR NO. ______ DATED _______ 9
 CHAPTER V
FUNDING
I. FUNDING STRATEGY

The Bank raises funds in different instruments, maturities and geographic markets.
Overreliance on a single or very few investors or markets will be avoided. MBI acts as a rural bank
with the aim of securing stable and broad market access to ensure that investors maintain credit
lines available for new investments.
If possible, the Bank will aim to establish a yield curve with several outstanding issues in
selected markets to create liquidity and more investor demand. Both public issues and private
placements are complementary and diverse funding sources for the Bank. Furthermore, the Bank
aims to ensure access to short- term funding by regularly issuing short-term debt.
The Bank takes no foreign exchange rate risks on new funding transactions. The maturity
profile of new funding should not create any significant gaps between the Bank’s loan maturity
profile and the borrowing.
In accordance with the target of a twelve-month survival horizon, the Bank’s funding plan is
based on the projected Target Liquidity Requirement and the size of the Liquidity Buffer. The
funding plan is updated regularly throughout the year to reflect changes in the size of the Target
Liquidity Requirement.

II. FUNDING AUTHORISATION

On a yearly basis all banking units headed by Area Managers provides the Board of Directors
with a suggestion for the funding authorization for the coming calendar year. The Board of
Directors authorizes the President of the Bank to raise funds up to a specified limit for the
upcoming year.

MARAYO BANK, INC. (A RURAL BANK) LIQUIDITY RISK MANAGEMENT MANUAL – APPROVED PER BR NO. ______ DATED _______ 10
 CHAPTER VI
CONTINGENCY PLAN
The Bank has defined an internal contingency plan in order to define relevant actions and
responsibilities should the bank encounter a serious liquidity crisis. The activation of the
contingency plan should be considered if the survival horizon drops below nine months, there is a
crisis situation of a bank-specific nature or a significant general market disruption occurs.
The Corporate Accountant with Internal Audit and Compliance informs the President and the
Executive Committee about the funding and liquidity situation. The President decides on the
activation of the contingency plan and subsequently informs the Board of Directors.

I. INTERNAL CONTINGENCY PLAN

The Board shall maintain the liquidity of the Bank to a level that is sufficient to sustain the
Bank's current operations and to withstand any anticipated or extraordinary demand against its
funding base. Such actions may include, but are not necessarily limited to:
a) selling assets;
b) obtaining lines of credit from the BSP;
c) obtaining lines of credit from other banks;
d) recovering charged-off assets; and
e) injecting additional equity capital.

The Board shall review the Bank's liquidity on a quarterly basis. Such reviews shall consider:
a) maturity schedule of certificates of deposit, including large uninsured deposits;
b) the volatility of demand deposits;
c) the amount and type of loan commitments and standby letters of credit;
d) an analysis of the continuing availability and volatility of present funding sources;
e) an analysis of the impact of decreased cash flow from the Bank's loan portfolio resulting
from delinquent and non-performing loans;
f) an analysis of the impact of decreased cash flow from the sale of loans or loan
participations; and geographic disbursement of and risk from brokered deposits.

The Board (or an appropriate committee) shall ensure that the Bank’s contingency funding plan is
amended to include potential scenarios which could impact liquidity sources such as deteriorating
asset quality. The Board shall ensure action is taken to ensure compliance with the liquidity and
contingency funding plans.

MARAYO BANK, INC. (A RURAL BANK) LIQUIDITY RISK MANAGEMENT MANUAL – APPROVED PER BR NO. ______ DATED _______ 11
 CHAPTER VII
REPORTING

The Board of Directors receives reporting on the Bank’s liquidity and funding situation in all its
regular meetings.
The reporting contains information about:
- the survival horizon and information on the results of stress testing;
- the size, asset composition and performance of the Liquidity Buffer (Cash and Due from
Other Banks;
- the size of bills payable, other loans and deposit liabilities.

MARAYO BANK, INC. (A RURAL BANK) LIQUIDITY RISK MANAGEMENT MANUAL – APPROVED PER BR NO. ______ DATED _______ 12