Liquidity

management

Liquidity management
Components of liquidity requirements Principles for sound liquidity risk management
A. Principles for sound liquidity risk management • Robust framework, including holding sufficient liquid assets to withstand
B. New liquidity ratios Liquidity framework stresses (including loss of funding sources)
Liquidity Coverage Ratio (30 days) Reduces ROE
Stock of high quality liquid assets • Liquidity buffer with negative P&L impact
• Established liquidity risk tolerance
≥100% • Lowered flexibility of balance sheet growth
Net cash outflows over a 30-day period Risk appetite
• Ensures that the bank has sufficient high quality liquid assets to survive a severe 30 day stress Introduces complexity into the business process

Governance
Net Stable Funding Ratio (1 year) • Prescribed stress scenario may differ from bank-specific scenario • Liquidity managed in line with tolerance
• Banks will have to continue to compute stressed liquidity requirements using Strategy, policy and • Senior management review
Available amount of stable funding
≥100% own stressors and a longer time horizon practices • Reporting to the Board
Required amount of stable funding • Will require the evolution of liquidity management from a product portfolio
• Promotes structural changes in the liquidity risk profiles of banks away from short-term funding to a customer portfolio basis, for the purpose of determining behavioural • Liquidity risk included in pricing, performance measurement and new
mismatches toward more stable, longer term funding assumptions Use test product process
• Limits over-reliance on short-term wholesale funding during times of buoyant market liquidity
C. Monitoring tools and heighten disclosure
• Include liquidity risk in Pillar 3 disclosures
• Mismatch reporting on BA 300 likely to change from maturity to cash flow basis
• Aligns regulatory reporting to how liquidity is managed in the business Disclosure

Liquidity risk appetite • Includes process for comprehensively projecting cash flows from assets,
Robust process liabilities, and off-balance sheet items over set of time horizons

The duration of a stress will
directly impact the total net
cash outflow
The period over which the bank
Stress horizon Target survival horizon is immunised against stress. • Exposure and funding needs monitored within and across legal entities,
Technically should reflect bank’s Monitoring and control business lines and currencies, taking into account transferability restrictions
estimate of the stress horizon,
but that need not be the case if
it wishes to assume liquidity risk • Diversification of sources and tenor of funding
Required liquidity resources
Funding strategy • Strong presence and relationships with funders

Measurement and management

• Regularly assess fundraising capacity and timing

Stress severity • Intra-day positions managed to allow timely settlement under normal and
Intraday positions stressed conditions

• Robust process for monitoring collateral available to be pledged and already

Liquidity risk management tool Liquidity risk management tool
Collateral management pledged, and how collateral may be mobilised rapidly
Funding tenor Cash flow impact of exogenous factors Funding concentration
Risk of funding withdrawal is reduced as soon as Given the current balance sheet structure, there is little a The rate of funding withdrawal is higher when funding
its tenor extends beyond the stress horizon. Tenor bank can do about the exogenous stresses. The challenge is concentrated. Diversification of funding sources • Short-term and protracted
extension reduces the impact of the exogenous factors is to estimate their impact on cash flows through the reduces the withdrawal rate, and the impact of the Stress testing • Institution-specific and market-wide
on cash flows. establishment of stressed cash flow assumptions. exogenous factors on cash flows. • Individually and in combination

• Emergency liquidity shortfalls

Contingency Funding • Strategies, policies, lines of responsibility, invocation and escalation procedures
Plan • Regularly tested and updated

• Unencumbered, high quality

Liquid assets • Cushion against stresses, including loss of funding sources

Basel III - January 2011

 Components of a liquidity measurement framework

Liquidity risk management objectives over the term structure

Intraday Stress horizon Medium and long term

0 1 mo / 3 mo? 6 mo 1yr > 1 yr

• Intraday: the bank has enough of a working stress buffer to meet unexpected daily cash outflows without recourse to
unacceptable levels of central bank support
• Stress horizon: the bank currently has liquid assets and long term funding sufficient to meet the target survival horizon
under conditions of stress
• Medium and long term: customer behaviour and new business volumes do not give rise to:
- a deterioration in long term funding ratios, or
- a concentration in funding types and sources, or
- structural changes in on- and off-balance sheet liquidity exposures
which would threaten achieving the target survival horizon in the future

Typical liquidity risk metrics

Regulatory metrics Risk management metrics

Liquidity Coverage Ratio (LCR): imposes minimum liquid Cash flow mismatch: Net cash flows per time bucket under
asset requirements based on a prescribed 30-day stress. contractual, behavioural and stressed cash flow projections.

Net Stable Funding Ratio (NSFR): imposes stable funding Long term funding ratio: The proportion of stable funding
requirement based on a prescribed one-year stress. relative to illiquid assets at 6 months, 1 year, 18 months,
2 years.

BA 300 reporting: SARB reporting of contractual, business Survival horizon: The length of time a bank can survive
as usual and stressed maturity mismatch, available sources under stress assumptions given its available stock of
of stress funding. liquid assets.
• The contractual projection is the building block of liquidity risk management, and the • The Board’s risk appetite and the LCR and NSFR requirements represent constraints on the
IFRS 7 reporting: Liquidity reporting for financial Forward survival horizon: The length of time a bank can basis of: funding options available to the bank
statement purposes. survive under stress under a projected balance sheet. - The contractual maturity ladders required by the SARB reporting • For example, should the bank elect to fund gaps with shorter term funding which is rolled
- Prescribed stress factors are applied to contractual balances maturing within 30 days to multiple times in order to minimise funding costs
generate the LCR, and to current values to generate the NSFR - The risk appetite and regulatory requirements (imposed via the LCR) will require an
Transition arrangements • Behavioural projections reflect expected balance sheets and cash flows. The behavioural increased level of liquid assets to be held. This marginal liquid asset holding presents
projection takes into account the behavioural decisions of customers and counterparties. an additional cost of lost margin which should be offset against any cost savings from
2011 2012 2013 2014 2015 2016 2017 2018 2019 Behavioural assumptions are generally generated from historical experience funding short
• The behavioural projection gives rise to a “realistic” balance sheet and cash flows, which - The bank’s ability to fund short will be limited when the NSFR limit is breached,
indicate a term structure of cash shortages and surpluses, and thus the term structure of irrespective of whether more liquid assets are held
LCR Observation period Minimum standard the funding requirement • Thus the optimal funding structure is a cost minimisation exercise, which needs to take
• The behavioural projection thus estimates how much funding is required in each time into account hard limits on short funding via the NSFR, and the associated holding cost of
NSFR Observation period Minimum standard bucket. It does not present any insights into how best to fund the gap liquid assets via the LCR and the Board’s risk appetite

Contact
Catherine Stretton
Partner
Financial Services Team
+27 84 444 7033
cstretton@deloitte.co.za