Liquidity represents the ability to fund assets and meet obligations as they become due. Liquidity is essential in all banks to compensate for expected and unexpected balance sheet fluctuations and provide funds for growth. Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is among the most important activities that a bank conducts.

Importance and basic components of liquidity stress tests

Submitted by sevans on Tue, 02/24/2015 - 3:25pm

Institutions should conduct stress tests regularly for a variety of institution-specific and market wide events across multiple time horizons. The magnitude and frequency of stress testing should be commensurate with the complexity of the financial institution and the level of its risk exposures. Stress test outcomes should be used to identify and quantify sources of potential liquidity strain and to analyze possible impacts on the institution's cash flows, liquidity position, profitability, and solvency.

Components of liquidity risk policies and reporting

Submitted by sevans on Tue, 02/24/2015 - 3:23pm

Policies also should specify the nature and frequency of management reporting. In normal business environments, senior managers should receive liquidity risk reports at least monthly, while the board of directors should receive liquidity risk reports at least quarterly. Depending upon the complexity of the institution's business mix and liquidity risk profile, management reporting may need to be more frequent. Regardless of an institution's complexity, it should have the ability to increase the frequency of reporting on short notice, if the need arises.

Components of liquidity risk policies and reporting

Submitted by sevans on Tue, 02/24/2015 - 3:23pm

Policies also should specify the nature and frequency of management reporting. In normal business environments, senior managers should receive liquidity risk reports at least monthly, while the board of directors should receive liquidity risk reports at least quarterly. Depending upon the complexity of the institution's business mix and liquidity risk profile, management reporting may need to be more frequent. Regardless of an institution's complexity, it should have the ability to increase the frequency of reporting on short notice, if the need arises.

Critical elements of sound liquidity risk management

Submitted by sevans on Tue, 02/24/2015 - 3:18pm

An institution's liquidity management process should be sufficient to meet its daily funding needs and cover both expected and unexpected deviations from normal operations. Accordingly, institutions should have a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk. Because of the critical importance to the viability of the institution, liquidity risk management should be fully integrated into the institution's risk management processes. Critical elements of sound liquidity risk management include:

Risk is the potential that events, expected or unanticipated, may have an adverse effect on the credit union’s net worth and earnings. The seven categories of risk for credit union supervision purposes are Credit, Interest Rate, Liquidity, Transaction, Compliance, Strategic, and Reputation. Any product or service may expose the credit union to multiple risks; these categories are not mutually exclusive.

CU manages are expected to manage risk – not eliminate risk

Submitted by sevans on Tue, 02/24/2015 - 3:03pm

Risk is fundamental to the operation of a credit union. Examiners, therefore, should not insist that the credit union eliminate risk, but, instead, should ensure that credit unions identify and manage their risks. The desired reward for taking risk is stable profitability and increased net worth. Credit unions must balance risk and reward responsibly. The examiner’s job requires assessing that the appropriate balance exists.

Holding a HQLA portfolio is not the only way to mitigate a bank’s liquidity risk. A bank must show that it has taken concrete steps to improve its LCR before it applies an alternative treatment. For example, a bank could improve the matching of its assets and liabilities, attract stable funding sources, or reduce its longer term assets. Banks should not treat the use of the options simply as an economic choice.

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