Assessing Risks to Liquidity and Funding in a Bank

The methodology to assess a bank’s liquidity comprises three elements:

  • inherent liquidity risk;
  • inherent funding risk; and
  • its governance and management.

It allows supervisors to form a view of the level of liquidity and funding risks faced by an institution, along with its management and controls. This will lead supervisors to determine whether any specific requirements are necessary to cover these risks to which the bank is or might be exposed.

The liquidity risk assessment evaluates the bank’s short- and medium-term liquidity risk over an appropriate set of time horizons, ensuring that the institution maintains adequate levels of liquidity buffers.

This assessment includes an evaluation of:

  • liquidity needs (short- and medium-term);
  • intraday liquidity;
    liquidity buffer and counterbalancing capacity, and
  • supervisory liquidity stress-testing.

A bank’s funding risk is assessed in order to determine whether the medium- and long-term obligations are met. The assessment is performed throughout an evaluation of:

  • the funding profile;
  • risks to the stability of the funding profile;
  • actual market access; and
  • expected changes in funding risks, based on the bank’s funding plan. 

The governance and risk management framework underlying the above-mentioned risks will also be reviewed, providing a comprehensive understanding of the bank’s risk profile. This evaluation comprises an assessment of the liquidity risk strategy and its tolerance, policies and procedures, risk identification, measurement, management, monitoring and reporting, and finally the bank’s own funding and contingency

This assessment will provide supervisors with an outcome which will be reflected in a summary of findings along with a score.