GLEBE ADMINISTRATION BOARD FINANCIAL SERVICES RISK MANAGEMENT POLICIES LIQUIDITY RISK MANAGEMENT

Transcription

1 GLEBE ADMINISTRATION BOARD FINANCIAL SERVICES RISK MANAGEMENT POLICIES LIQUIDITY RISK MANAGEMENT As at 1 September 2014

2 GAB Financial Services Liquidity Risk Management Policy Objective of this Policy 1. The objective of this Policy is to set out the policies of Glebe Administration Board ( GAB ) for the management of liquidity risk within its Financial Services. It sets out a framework to ensure that liquidity risk is managed in line with, so far as it is appropriate that they be applied, the core principles of the relevant standards and guidelines of the Australian Prudential Regulatory Authority ( APRA ), prudent business management, and relevant internal policies. 2. The Policy specifically covers the processes of GAB to manage the liquidity risk in Financial Services, and adequate and timely reporting to ensure effective management of liquidity. Liquidity Risk 3. Liquidity Risk is the risk of not having sufficient liquidity to meet the obligations of Financial Services as they fall due. More specifically Liquidity risk relates to the occurrence of one or more future events which affects GAB s level of liquidity and therefore its ability to meets its obligations as they fall due. The occurrence of the future events which affect liquidity is uncertain. The consequence of insufficient liquidity is negative because the viability of Financial Services may be threatened, the reputation of GAB may be negatively affected and future net interest margins may be reduced. 4. GAB s exposure to liquidity risk arises from a mismatch between cash in flows and cash out flows arising from assets and liabilities, and non interest income and expenses. Mismatches may occur due to a range of future potential events including excessive depositor withdrawals the concentration of large deposits held by a small number of depositors and the withdrawal of a significant portion of those funds the concentration of maturing deposits a large maturity mismatch between assets and liabilities unplanned outflows due to unexpected market developments such as an economic downturn or the actions of a competitor to attract funds. Liquidity Risk Management 5. Liquidity risk management involves managing the current and future levels of liquidity to ensure Financial Services can meet its obligations as they fall due. Regulatory Considerations Australian Prudential Standards 6. Financial Services operates on the basis of an exemption from the Banking Act 1959, with certain conditions. However, GAB has decided generally to adopt the relevant core underlying principles for effective risk management contained in APRA s Australian Prudential Standards (APS) as a basis for good management, in so far as those principles can be appropriately applied. 7. The most relevant APS standard in relation to liquidity risk management is APS 210 Liquidity. This prudential standard sets out principles for managing and measuring liquidity risk in financial institutions.

3 Liquidity Risk Management Introduction 8. Liquidity risk in Financial Services is managed or will be managed via the following processes monitoring material changes in the level of deposits cash flow forecasting limiting the maximum term to duration of assets (investments and loans) and the minimum term to duration of liabilities (deposits) limiting the maximum average term to duration of assets and liabilities the holding of high quality liquid assets the holding of cash and treasury investments liquidity plans for large deposits alternate liquidity sources realising the investment portfolio Monitoring material changes in the level of deposits 9. Monitoring material changes in the level of deposits in Financial Services assists GAB identify any trend in withdrawals which may result in a liquidity risk. 10. The total amount of deposits in Financial Services is to be calculated at the end of each month. Cash flow forecasting 11. Cash flow forecasting for Financial Services assists GAB identify any cash flow mismatches which may result in a liquidity risk. 12. Cash flow forecasting is to be undertaken on a rolling 12 month basis, and will be undertaken no less frequently than quarterly. Limiting the maximum term to duration of assets 13. The maximum term to duration of an Authorised Treasury Investment (as defined in the Credit Risk Management Policy) is not to exceed 12 months. 14. The maximum term of a loan to an Authorised Loan Counterparty (as defined in the Credit Risk Management Policy) is not to exceed 5 years. Limiting the maximum average term to duration of assets and liabilities 14A. The degree of the mismatch between the average term to duration of the assets of Financial Services and the average term to duration of the liabilities of Financial Services is one measure of the liquidity risk associated with the operations of Financial Services. To assist in ensuring that Financial Services maintains adequate liquidity at all times GAB has determined that from 1 January 2015 (a) the weighted average term to duration of the assets of Financial Services is not to exceed 24 months, and (b) the weighted average term to duration of the liabilities of Financial Services is to be not less than 2 months. The holding of high quality liquid assets 15. High quality liquid assets ( HQLA ) are investments with an authorised deposit taking institution which are convertible to cash within 2 business days or less and meet the credit risk quality as defined in the Credit Risk Management Policy. Term deposits by their very nature are to be held till maturity, GAB therefore recognises only 11AM deposit accounts as HQLA. Term deposits with institutions that offer early term deposit redemptions are not considered HQLA for these purposes. 16. GAB is to maintain a minimum holding (excluding accrued interest) of 10% of its total liabilities in HQLA, at all times. For this purpose, liabilities means the total liabilities of Financial Services, including equity.

4 17. GAB also recognises that it is appropriate to have an escalation trigger in relation to the holding of HQLA. GAB considers that a holding (excluding accrued interest) of 11% of total liabilities in HQLA, sets an appropriate escalation trigger. GAB expects that the holding of HQLA will not be less than the escalation trigger. For this purpose, liabilities means the total liabilities of Financial Services, including equity. Cash and Treasury Investments 18. GAB will ensure that the total amount of the cash and Authorised Treasury Investments of Financial Services (including HQLA and excluding accrued interest) is at all times not less than 25% of the total liabilities of Financial Services, including equity. 19. GAB also recognises that it is appropriate to have an escalation limit in relation to the holding of cash and treasury investments. GAB considers that a holding of cash and Authorised Treasury Investments (excluding accrued interest) of 30% of the total liabilities of Financial Services, including equity, sets an appropriate escalation limit. GAB expects that the holding of cash and Authorised Treasury Investments will not be less than the escalation limit. 20. [Paragraph not used.] Liquidity plans for large deposits 21. A large deposit is one where the value of the deposit with GAB is more than 5% of the total liabilities of Financial Services. An individual liquidity plan for each large deposit assists in the maintenance of overall liquidity. 22. GAB will maintain individual liquidity plans for each large deposit which will be reviewed no less frequently than annually. Alternate liquidity sources 23. GAB may, from time to time, negotiate standby facilities with an authorised deposit taking institution to provide short term liquidity. The need for such facilities will be reviewed on an ongoing basis. Realising Investment Portfolio 24. The externally managed investments in the investment portfolio of GAB include a large portion of highly liquid assets. In an extreme situation, these assets can be liquidated in a short period of time to support the liquidity of Financial Services. Reporting 25. Reports about the following matters are to be provided to each meeting of GAB the total amount of the deposits held by Financial Services at the end of the previous month and, if that amount is less than 95% of the total amount of the deposits at the end of the immediately preceding month, a report about the reasons for the decline in the deposits and the forecasts for the total amount of deposits in the 3 succeeding months, the value of the HQLA held by Financial Services at the end of the previous month, as a percentage of total liabilities of Financial Services (including equity) at the end of that month and, if the value is less than the escalation limit, the remedial action which should be prudently taken and the timeframe for that action, the total value of the cash and Authorised Treasury Investments held by Financial Services at the end of the previous month, as a percentage of total liabilities of Financial Services (including equity) at the end of that month, when the relevant policy has been determined (see paragraph 20), the gap (in months) between the average duration of the assets of Financial Services, and the average duration of its liabilities. 26. Each quarter, reports about the following matters are to be provided to GAB cash flow projections for the forthcoming 12 months and, if such forecasting indicates that a breach of this Policy is likely, the remedial action which should be prudently taken and the timeframe for that action,

5 compliance with the terms of any standby facility effected by GAB as an alternate liquidity source. 27. GAB is to be provided with reports about any matter which is a breach of this Policy as soon as practical after that breach has occurred and the remedial action which has been taken, or which should be prudently taken and the timeframe for that action. Staff Training 28. All staff involved in monitoring and reporting about liquidity risk are to have appropriate experience in, training and understanding of liquidity risk and this Policy. Such staff are required to undertake appropriate training. Review of this Policy 29. GAB will review this Policy each year, and more frequently if circumstances require. 30. [Paragraph not used.] Document Approval 31. This Policy was approved by GAB on 28 March 2012 and amended on 29 August 2012, 19 December 2012, 28 August 2013 and 27 August 2014.