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In order to mitigate cliff effects that could arise, if an eligible liquid asset became ineligible (e.g. due to rating downgrade), an institution is permitted to keep such assets in its stock of liquid assets for an additional 30 calendar days. This would allow the institution additional time to adjust its stock as needed or replace the asset.
Dec 15, 2019 · 30.1. The numerator of the Liquidity Coverage Ratio (LCR) is the "stock of high-quality liquid assets (HQLA)". Under the standard, banks must hold a stock of unencumbered HQLA to cover the total net cash outflows (as defined in LCR40) over a 30-day period under the stress scenario prescribed in LCR20. In order to qualify as HQLA, assets should ...
An institution should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.
- Introductionnote de Bas de Page 1
- Liquidity Risk
- Sound and Prudent Liquidity Risk Management
- Assessment of Liquidity Adequacy
- Mitigation of Liquidity Risk
- Crisis Management
Liquidity is critical to the ongoing viability of any financial institution. Poor management of liquidity risk can lead to undue financing costs and difficulty liquidating assets at fair value. This risk may be greater if a financial institution’s reputation is damaged. Similarly, a financial institution’s capitalization can impact its ability to o...
Liquidity refers to a financial institution’s ability to meet its current and anticipated financial obligations as they come due, without disrupting its operations and without incurring substantial losses. Accordingly, liquidity risk results from a financial institution’s difficulty or inability to meet its liquidity obligations in a timely manner ...
This A document that describes the steps that financial institutions can take to satisfy their legal obligation to follow sound and prudent management practices and sound commercial practices. favours a principles-based approach and does not impose quantitative requirements regarding ratios or thresholds. Under this approach, the AMF expects financ...
Financial institutions should critically assess their level of liquidity and their future needs based on their risk profile and business plans. The implementation of an internal liquidity adequacy assessment process should allow them to maintain their liquidity at adequate levels on an ongoing basis.
4.1 Diversification of funding sources
A financial institution should avoid any potential concentration of certain sources of funding. To this end, the financial institution should analyze the various characteristics of its liabilities and their impact on its liquidity position in light of the following: 1. maturities of liabilities and their A measure of the variability of the price of an asset.; 2. percentage of holdings of secured and unsecured funding; 3. reliance on: 3.1. a single provider of funds or on a related group of pr...
4.2 Market access
A financial institution should ensure that it has opportunities to borrow or issue debt An interest in or charge on property taken by a creditor or guarantor to secure the payment or performance of an obligation. on the market if necessary, even during a crisis. The financial institution should also expand its funding opportunities and develop solid and lasting relationships with funds providers. The financial institution should be able to assess its ability to obtain funding in local currenc...
4.3 Management of foreign currency liquidity risk
The financial institution could use foreign currency deposits or loans in order to fund a portion of its liquidity requirements in local currency or foreign currencies. The financial institution could also convert liquidity in local currency in order to meet foreign currency liquidity needs. In both cases, it should take the following factors into consideration: 1. the convertibility of each currency, the A measure of the variability of the price of an asset.of the exchange rate, and the dela...
5.1 Contingency plan
The principal objective of the contingency plan should be to identify and document the various processes to be implemented and steps to be taken in order to manage a liquidity crisis effectively and efficiently. The results of the scenario analyses and stress tests should be incorporated into the contingency plan. These results should be used as the basis for identifying the various crises that could affect the financial institution’s liquidity and estimating their severity. The financial ins...
High levels of liquidity creation can result in more illiquid bank balance sheets. For example, banks create the highest levels of liquidity when they provide long-term loans using short-term funding from depositors. This, however, exposes banks to liquidity risk.
- Annika Gnann, Sahika Kaya
- 2019
The liquidity value of an asset depends on the underlying stress scenario, the volume to be monetised and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts in sale or repurchase agreement markets due to fire sales, even in times of stress.
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How? • How do liquidity requirements, capital requirements, and bank resolution rules interact? • How have bank liquidity levels changed in recent years? What is liquidity at a bank?...
