Guidance Note: Liquidity. July Ce document est aussi disponible en français.

Transcription

1 Guidance Nte: Liquidity July 2016 Ce dcument est aussi dispnible en français.

2 Cntents Intrductin... 3 Gvernance and Liquidity Risk Tlerance... 4 Liquidity Management Philsphy... 5 Liquidity Plicy... 5 General Plicy Guidelines... 6 Measuring, Managing and Mnitring Liquidity... 7 Assets Held Fr Liquidity... 7 Brrwings and Other Funding... 8 Cllateralized Brrwing... 8 Securitizatins... 8 Asset Sales... 9 Large Depsits... 9 Operatinal Prcedures... 9 Mnitring Liquidity Needs... 9 Funding Requirements Liquidity Testing Stress Testing Metrics Assessing Liquidity Testing Results Managing Market Access Cntingency Funding Planning Internal Cntrls and Incentives Summary f Key Activities Annual Business Plan Disclsure DICO Assessment Prcess Guidance Nte: Liquidity 2

3 Intrductin Liquidity is the ability f a credit unin t generate r btain sufficient cash r its equivalents in a timely manner at a reasnable price t meet its cmmitments as they fall due. Liquidity risk arises frm a credit unin s ptential inability t meet bth expected and unexpected current and future cash flw and cllateral needs withut affecting daily peratins r its financial cnditin. A credit unin s bligatins, and the funding surces used t meet them, depend significantly n its business mix, balance sheet structure, and the cash flw prfiles f its n- and ff-balance bligatins. These include funding mismatches, market cnstraints n the ability t cnvert assets int cash r in accessing surces f funds, and cntingent liquidity events, such as finding additinal funds fr undrawn lan cmmitments r replacing maturing liabilities. A liquidity management framewrk shuld include: A gvernance structure and Bard-apprved liquidity risk tlerance that is reflected in liquidity and funding plicies, business strategies, reprting framewrks, and risk management and cntrl functins A liquidity management philsphy which sets ut brad liquidity gals and bjectives f the credit unin A liquidity plicy that sets ut all key elements f liquidity management, including targets, limits and diversificatin f funding surces Onging measurement, management and mnitring f assets held fr liquidity purpses and funding requirements Liquidity testing metrics including analysis f changes t funding requirements under alternative scenaris A liquidity cntingency plan t address liquidity requirements in stressed situatins At a minimum, credit unins shuld: Maintain a liquidity risk management framewrk and cntrls t identify, measure, manage and mnitr liquidity risk expsures under nrmal cnditins Maintain structurally sund funding plans Develp ptential scenaris that stress liquidity levels and ensure liquidity surces and cntingency funding plans cntinue t be adequate t meet highly unlikely but plausible scenaris The framewrk must reflect the nature, scpe, cmplexity and risk prfile f the credit unin and its liquidity risk expsures. Guidance Nte: Liquidity 3

4 In accrdance with the prvisins set ut in sectin 85 f the Credit Unins and Caisses Ppulaires Act, 1994 (the Act), DICO may rder a credit unin t amend its liquidity plicies if they are cnsidered inadequate r imprudent and cnsiders it necessary t prtect the interests f members, sharehlders r depsitrs r t ensure the financial security and integrity f the credit unin. Under sectin 86 f the Act, DICO may rder a credit t prvide additinal liquidity and in such frms and amunts as it may require where DICO has btained satisfactry evidence that ne r mre f the fllwing criteria have been met: Material nn-cmpliance with the capital and liquidity requirements f By-law #5 and any guidelines r directives issued by DICO An abnrmal event has ccurred that may trigger, fr example, demand fr depsits, nn-payment f lans etc. Significant cncentratin risk in the lan prtfli r cmpsitin f member depsits Lw r declining levels f liquidity that may nt adequately meet cash flw requirements Excessive brrwings, r insufficient brrwing capacity t meet business needs Plant clsure r ther significant ecnmic event High risk lans r investments identified during an examinatin Capital r liquidity insufficient t meet business risks that may nt be fully captured under the risk weighted capital test (BIS) And any ther situatins which in the pinin f DICO may have an adverse effect n liquidity Gvernance and Liquidity Risk Tlerance The Bard is ultimately respnsible fr setting the risk tlerance fr liquidity risk and ensuring that liquidity risk tlerance is effectively cmmunicated s management understands the credit unin s apprach t managing the trade-ffs between the risks taken and the ptential benefits. In additin, the Bard shuld ensure that it: Understands the nature f the credit unin s liquidity risk and reviews the infrmatin necessary t maintain this understanding at least annually Establishes lines f authrity and respnsibility fr managing the credit unin s liquidity risk Effectively versees management in the identificatin, measurement, mnitring and cntrl f liquidity risk in accrdance with its liquidity risk tlerance plicy Understands and peridically reviews the credit unin s plans and strategies fr dealing with adverse liquidity events and ptential stress situatins Understands the liquidity risk prfiles f key subsidiaries, as apprpriate Guidance Nte: Liquidity 4

5 Liquidity Management Philsphy Adpting a liquidity management philsphy is an imprtant first step in drafting liquidity plicy. The philsphy sets ut the brad gals and bjectives f the credit unin with regards t liquidity, as established by the Bard. This philsphy gverns all liquidity plicy cnstraints and helps address new situatins where plicy des nt yet exist. While gals and bjectives will differ depending upn the business mdel and perating envirnment f the credit unin, imprtant principles f liquidity management shuld always address the fllwing key issues: Ensuring enugh liquidity t guarantee the rderly funding f members needs and peratinal expenses Prviding a prudent cushin fr unfreseen liquidity needs; and achieving an apprpriate balance between investment security, liquidity and yield Liquidity Plicy Credit unins shuld establish and implement dcumented, sund and prudent liquidity and funding plicies recmmended by senir management that are, apprved and reviewed at least annually by the Bard. Liquidity plicies shuld articulate the imprtance senir management places n liquidity and the credit unin's liquidity gals and funding needs. The chice f analytical tls and the level f sphisticatin f infrmatin systems shuld be cmmensurate with the size and risk prfile f the credit unin, the range and stability f its funding surces and the extent t which external funding is needed t meet lending needs. T be cnsidered prudent, the liquidity plicy will address: Identificatin f ptential risks that culd impact liquidity and ensuring all cash utflw cmmitments (n- and ff-balance sheet) are hnured n a daily basis by perfrming match and funds flw analysis; limits, targets and diversificatin f acceptable funding and brrwing surces bth n and ff balance sheet Target levels in aggregate and by type f high quality, unencumbered assets that are designated as held fr liquidity purpses cnsistent with the credit unin s risk tlerance Liquidity management cntingency plans Maturity matching and/r hedging f large depsits Prcesses fr determining, reviewing, apprving and applying liquidity testing scenaris and related assumptins The frequency, frm and cntent f Bard reprting In assessing a credit unin s implementatin f these business practices, attentin will be paid t the cntent and frequency f reprts by management r the internal auditr f cmpliance with Bard-apprved plicies and cntrls. Guidance Nte: Liquidity 5

6 General Plicy Guidelines Minimum perating liquidity levels shuld be established that prvide a reasnable cushin t meet cash needs, even during perids f market vlatility r stress and seasnal fluctuatins. A target range fr liquidity shuld be established t reflect the fact that t much liquidity has a negative effect n earnings. The target range fr perating liquidity shuld als reflect expected perating needs based n analysis f at least tw previus years fluctuatins, expected increases/decreases in lan demand, incme requirements fr the year, and any ther knwn factrs which may have an effect n available liquidity. Liquidity shuld be managed in a prudent manner and in full accrdance with the requirements in plicy. If variances frm plicy arise it is incumbent n management t put in place timely measures t crrect the variance, including invking the cntingency funding plan as necessary, and t reprt such actins t the Bard. In circumstances where the cntingency funding plan is either inadequate, plicy shuld include a requirement fr ntifying the Regulatr. Credit unins shuld establish limits t ensure that: Depsit liabilities are nt be unduly cncentrated with respect t: An individual persn and cnnected persns The type f depsit instrument The term t maturity The market surce f funds if applicable Brrwings are nt be unduly cncentrated with respect t: Surce f brrwing The term t maturity When setting liquidity target and limit ratis, and assessing liquidity adequacy in accrdance with this guidance nte, brrwing, as reprted t DICO thugh regular infrmatin fillings, shuld include all n and ff balance sheet securitizatins in any frm (residential, cmmercial, asset backed, leases etc.). Fr the purpses f calculating DICOs standard liquidity rati, brrwings (n and ff- balance sheet) shuld include nly securitizatins that becme due within the next twelve mnths. Adequate measuring, mnitring and reprting n the credit unin s liquidity risk levels and expsures shuld be maintained. It is recmmended that liquidity needs shuld be reviewed n less frequently than mnthly. This review shuld encmpass a detailed frecast f imminent liquidity requirements and a brad prjectin f cash needs fr the next three-mnth perid. The use f liquidity management tls shuld be utlined in the liquidity plicy. Summary analysis f the varius measurements f liquidity shuld be prepared fr Bard review at each Bard meeting. Where liquidity declines belw the mid-pint f the target range the credit unin shuld measure liquidity risk n a mre frequent basis. Guidance Nte: Liquidity 6

7 Measuring, Managing and Mnitring Liquidity A sund framewrk fr identifying, measuring, managing and mnitring surces and uses f liquidity and the cmmensurate risk shuld have several dimensins including: a cmprehensive liquidity measurement prgram that is integrated within the liquidity management strategy and cntingency funding plan f the credit unin. Cmpnents f such a prgram shuld include the cmbinatin f: a prcess fr measuring and reprting pr-frma funding requirements thrugh the prjectin f cntractual and cntingent cash flws maintenance f a stck f high-quality unencumbered liquid assets that can be cnverted under stress cnditins int cash withut incurring undue lsses a cntingency funding plan that addresses liquidity testing utcmes; prcesses fr: internal limit setting and mnitring and reprting cntrls cnsistent with the credit unin s risk tlerance measuring business perfrmance and maintaining prper incentives fr individual business lines t ensure they are assigning a liquidity cst r benefit t different business activities managing access t a diversified set f funding surces and maturities infrmatin system requirements and the necessary persnnel with the apprpriate expertise t ensure timely measuring, mnitring and reprting f liquidity psitins against limits t senir management and the Bard t supprt apprpriate actin, respnse and versight Assets Held Fr Liquidity Sectin 21 f the Regulatin utlines the requirements fr adequate liquidity fr Class 2 credit unins. Sectin 84 f the Regulatins requires that the types f assets held fr liquidity purpses are identified in the financial statements f Class 2 credit unins. Assets held fr liquidity shuld cnsist f cash and high quality securities fr which there is a brad and active secndary market where these assets can be liquidated thrugh their sale t a wide range f cunterparties withut incurring a substantial discunt, thereby securing their status as dependable surces f cash flw. The purpse f these assets is t prvide the credit unin with time t access alternative surces f funding, in the event that circumstances giving rise t a liquidity prblem arise. Fr the purpses f liquidity management, cash can nly be included in the assets held fr liquidity when the currency is in the pssessin f, wned by and under the direct cntrl f the credit unin. Examples include cash in the frm f Bank f Canada currency in the credit unin s care custdy and cntrl (e.g. vault, teller s drawers r ATMs wned and perated by the credit unin). When determining which assets can be included in assets held fr liquidity, the credit unin s plicies must als cnsider the existence f impediments that wuld prevent a quick sale t meet unanticipated net cash utflw requirements. Guidance Nte: Liquidity 7

8 Under sectin 22 f the Regulatin, an encumbered asset shuld nt be used t satisfy the requirements fr adequate liquidity except where the asset is encumbered by a security interest in favur f the Crpratin. Assets held fr liquidity may nt include assets pledged t leagues and ther financial institutins as security fr the prvisin f clearing and settlement functins. When establishing the minimum targets fr assets held fr liquidity, a credit unin shuld cnsider its verall liquidity prfile including factrs such as asset quality, stability f funding surces, cst and diversity f funding, shrt-term funding requirements. Brrwings and Other Funding In situatins f liquidity shrtages, credit unins may need t brrw funds t meet liquidity needs. When ding s, the credit unin needs t be aware f regulatry limits n brrwings and n the creatin f security interests. Under sectin 183 f the Act, a credit unin may nt brrw mre than 50 per cent f the credit unin s regulatry capital and depsits. Under subsectin 48 (3) f the Regulatin, a credit unin may nly grant a General Security Agreement (GSA) where the debt is wed t a league, Central 1 Credit Unin, La Fédératin des caisses Desjardins du Québec r La Caisse centrale Desjardins du Québec, r Credit Unin Central f Canada. The GSA must include a prvisin permitting its assignment t the DICO under the circumstances set ut in s.48(4) f the Regulatin. Under n circumstances may security be granted ver assets identified as Assets Held fr Liquidity. Cllateralized Brrwing Under subsectin 48(3) f the Regulatins, a credit unin may, under certain cnditins, brrw an aggregate amunt up t 15 per cent f its ttal assets secured by a fixed charge against identified assets. Securitizatins Securitizatin is the financial practice f pling varius types f cntractual debt such as residential mrtgages, cmmercial mrtgages, aut lans r credit card debt bligatins (r ther nn-debt assets which generate receivables) and selling their related cash flws t third party investrs as securities, which may be described as bnds, pass-thrugh securities, r cllateralized debt bligatins (CDOs). Investrs are repaid frm the principal and interest cash flws cllected frm the underlying debt and redistributed thrugh the capital structure f the new financing. Securities backed by mrtgage receivables are called mrtgage-backed securities (MBS), while thse backed by ther types f receivables are asset-backed securities (ABS). Fr example, a credit unin may create a Natinal Husing Act Mrtgage Backed Security ( NHA MBS ) fr the purpse f hlding n their balance sheet and selling int the market place r pledging as cllateral fr cash. Under IFRS where these transactins are sld int the market they are generally accunted fr as secured financings. In sme cases, securitizatin transactins may qualify fr ff balance sheet treatment. Ntwithstanding the accunting treatment, fr the purpses f determining the adequacy f liquidity DICO cnsiders these transactins part f a credit unin s ttal brrwings. Guidance Nte: Liquidity 8

9 As depsit taking institutins, credit unins shuld fcus n depsits rather than ther types f funding which may nt be reliable surces during times f stress r market disruptins. When assessing the adequacy f liquidity and liquidity gvernance practices, DICO expects that the Bard establishes apprpriate and prudent limits n the aggregate amunt f securizatins, bth n and ff balance sheet f n mre than 40% f ttal regulatry capital and depsits. Of this, securitizatins ther than NHA MBS/CMB shuld be limited t n mre than 5% f ttal regulatry capital and depsits unless specific apprval is sught frm DICO. This wuld prvide a reasnable cushin fr additinal shrt term emergency brrwing in times f liquidity shrtfalls. Asset Sales A credit unin can sell assets t third parties t raise funds in a liquidity event; hwever, the credit unin shuld be aware that under a liquidity event third party buyers f assets may themselves be unable t purchase assets. Therefre nly asset sales which a credit unin is cnfident wuld be able t transact under a liquidity event shuld be cnsidered as a funding surce. Where 15% r mre f the assets f a credit unin are being sld, the transactin must be apprved by DICO pursuant t sectin 204 f the Act.. Large Depsits Credit unins that rely n a significant number f large depsits have a higher risk f vlatility in its liquidity levels than thse whse depsit base cnsists f many smaller sized accunts. The withdrawal f large depsits due t either interest rate cmpetitin r members' investment discretin can significantly reduce liquidity and shuld be limited as much as pssible. Credit unins shuld adpt a plicy which requires the identificatin and mnitring f depsits held by a member that are ver a certain size and may require a ntice perid befre the withdrawal f large depsits can be made. When defining large depsits, the credit unin may want t distinguish between large institutinal r whlesale depsits and large retail depsits. When determining what qualifies as a large depsit, management shuld cnsider the ttal aggregate amunt f depsits that belng t an individual and grup f cnnected persns. Plicy shuld require the apprpriate maturity matching f any large depsits and wuld generally require higher liquidity levels based n the cncentratin f large less stable depsits. Operatinal Prcedures Prcedures shuld address hw liquidity needs are t be mnitred and hw t deal with liquidity shrtages r excesses. Mnitring Liquidity Needs Liquidity needs shuld be reviewed n a peridic basis, but nt less frequently than mnthly. This review shuld encmpass a detailed frecast f imminent liquidity requirements. Summary measurements and analysis f liquidity needs shuld be prepared fr Bard review at each Bard meeting. T determine immediate cash flw needs, a cash flw statement can be used t develp prjectins fr the next three mnths. Peridic (weekly r mnthly) cash flw prjectins can predict whether excess r deficient liquidity levels will be experienced by the credit unin in the near future. Guidance Nte: Liquidity 9

10 If deficiencies are belw peratinal levels, management will have t take actin t crrect these levels. This actin plan shuld be presented fr apprval by the Bard. Funding Requirements Analyzing funding requirements invlves the cnstructin f a maturity ladder f its assets and liabilities and the calculatin f a cumulative excess r shrtfall f funds at selected maturity dates. A credit unin s funding requirements are determined by examining its future cash flws based n the future behaviur f assets and liabilities and ff-balance sheet items including interim cash flws r settlements f financial derivatives, and then calculating the cumulative excess ver the time frame fr the liquidity assessment. Assessing the funding surplus/shrtfall requires cnsideratin f, amng ther things: the amunt f readily cashable assets held fr liquidity relative t the surplus/shrtfall; the size f the surplus r shrtfall relative t ttal funding; the diversity f funding surces; and the quality f assets. Liquidity Testing Evaluating whether a credit unin is sufficiently liquid depends greatly n the behaviur f cash flws under different cnditins using a number f different appraches including scenari testing and stress testing. Sensitivity testing typically invlves an incremental change in a risk factr (r a limited number f risk factrs). Scenari testing uses a hypthetical future state and changes in risk factrs affecting an institutin s peratins. This cnsiders changes t a number f risk factrs, as well as pssible ripple effects and impacts that fllw lgically frm these changes. Stress testing is a mre cmprehensive risk management technique used t evaluate the ptential shrt term and lnger term impacts n an institutin s financial cnditin frm exceptinal but plausible events, and t attempt t determine the impact f situatins where the assumptins used in managing a business break dwn. Stress testing includes an assessment f all risk factrs using cnsistent criteria and assumptins fr defined stress cnditins. Sensitivity and scenari testing shuld be amng the measurement techniques used by a credit unin as part f its cntingency planning prcess. Credit unins shuld als include ptential liquidity requirements f its subsidiaries where apprpriate. Scenaris tested shuld include, at a minimum, the fllwing: a credit unin s "ging cncern" cnditin and an unexpected specific disruptin. The ging cncern scenari establishes a benchmark fr the "nrmal" behaviur f balance sheet-related cash flws in the rdinary curse f business. A liquidity disruptin that remains cnfined t the credit unin itself prvides ne type f "wrst case" benchmark. Under each scenari a credit unin wuld try t include any significant swings in cash flws and funding requirements. Liquidity testing requires a credit unin t make assumptins abut the prbable behaviur f the timing f cash flws fr each type f asset and liability under the cnditins being examined. Guidance Nte: Liquidity 10

11 Fr example, this may include develping assumptins fr varius funding surces and whether the liability wuld be: (1) paid in full at maturity; (2) gradually run ff ver the next few weeks; r (3) virtually certain t be rlled ver. The uncertainties invlved in making such estimates require a cnservative bias tward assigning later dates t cash inflws and earlier dates t cash utflws. Credit unins are expected t create at least ne scenari that results in a liquidity psitin that requires the activatin f their cntingency funding plan. Stress Testing Metrics Credit unins with assets in excess f $500 millin are expected t develp mre cmprehensive liquidity testing prgrams that cnsider multiple scenaris f varying degrees f stress and time hrizns as set ut in the Guidance Nte: Stress Testing. The LCR, NSFR and NCCF are standardized metrics intrduced by BCBS 1 and adpted by regulatry bdies in Canada including OSFI and credit unin regulatrs t help measure, mnitr and manage the level f liquidity at financial institutins beynd the simple liquidity rati under minimum specified stress assumptins. Credit unins with assets in excess f $500 millin are required t adpt these metrics effective n later than January Other credit unins may wish t cnsider using ne r mre f these metrics t help supplement their wn liquidity testing prcesses as apprpriate. Additinal infrmatin n the LCR, NSFR and NCCF metrics can be fund in the Guidance Nte: Stress Testing and n DICO s website. Assessing Liquidity Testing Results The utcmes f the liquidity testing shuld be cmpared against the stated risk tlerance f the credit unin; integrated int management decisins including limit setting and internal pricing systems; and incrprated int the design f cntingency funding plans, including the determinatin f actin plans allwing fr the rapid escalatin f infrmatin and implementatin f a crdinated respnse by the credit unin under a stress scenari. The extent and frequency f liquidity testing shuld be cmmensurate with the nature, scpe, cmplexity and risk prfile f the credit unin and its liquidity risk expsures. Credit unins shuld build in the capability t increase the frequency f tests in special circumstances, such as vlatile market cnditins. Liquidity testing results and any subsequent actins are t be reprted t and discussed with the Bard and integrated int the credit unin s strategic planning prcess and day-t-day risk management practices. Testing results shuld als be a key cnsideratin when establishing internal limits and assessing impacts n peratins and ther risks f the credit unin as well as assessing and planning fr related ptential funding shrtfalls in the credit unin s cntingency funding plan. When prjected funding deficits are larger than (r prjected funding surpluses are smaller than) the credit unin s liquidity risk tlerance, management shuld cnsider, in cnsultatin with the Bard, whether t: adjust the peratinal plans t cpe with the situatin; adjust the credit unin s liquidity psitin; r 1 Basel Cmmittee n Banking Supervisin Guidance Nte: Liquidity 11

12 blster the cntingency funding plan. The duratin (temprary r permanent) f the funding issue will influence the steps taken and the chice f which steps t take t address the situatin. A critical element f a credit unin s resilience t liquidity stress is the cntinuus availability f an adequate cushin f unencumbered, high-quality liquid assets that can be used t supprt a range f alternative scenaris. Credit unins must determine hw much liquidity will be maintained (within the Bard apprved range), and demnstrate that their liquidity psitin is adequate. The size f the liquidity cushin is expected t be aligned with the risk tlerance and risk prfile f the credit unin. Credit unins shuld ensure that its cushin f liquid assets is sized t maintain sufficient resilience t unexpected stress while it cntinues t meet daily payment and settlement bligatins n a timely basis during the perid f stress. Credit unins shuld hld a cre f the mst liquid assets, such as cash and gvernment securities, t prtect against the mst severe f stress scenaris. T ensure against less intense, but lnger duratin stress events, the cmpsitin f the liquidity cushin may be widened t hld ther unencumbered liquid assets that are marketable withut resulting in excessive lsses r discunts. The marketability f individual assets may differ depending n the stress scenari and timeframe invlved. Credit unins shuld nt assume that a liquid market will exist fr assets held during stress scenaris simply because a market exists in nrmal times. Managing Market Access Fr credit unins that participate in the financial markets, the funding strategy shuld prvide effective diversificatin in the surces and duratin f funding. It shuld ensure an nging presence in its funding markets and strng relatinships with funds prviders are maintained t prmte effective diversificatin f funding surces. A credit unin shuld regularly gauge the capacity t raise funds quickly frm each surce. It shuld identify the main factrs that affect its ability t raise funds and mnitr thse factrs clsely t ensure estimates f fund raising capacity remain valid. As a check fr adequate diversificatin f liabilities, a credit unin needs t examine the level f reliance n individual funding surces by instrument type, etc. and set internal limits n the maximum amunt f funds it will accept in the nrmal curse frm any ne cunterparty r any ne funding market (e.g., depsit brkers, securitizatin r cmmercial paper) that is apprved and mnitred by the Bard. Develping markets fr asset sales r explring arrangements under which a credit unin can brrw against assets is an imprtant element f managing market access. The frequency f use f sme asset-sales markets is a pssible indicatr f a credit unin s ability t execute sales under adverse scenaris. Guidance Nte: Liquidity 12

13 Cntingency Funding Planning Credit unins shuld have a frmal cntingency funding plan (CFP) that clearly sets ut the strategies fr addressing liquidity shrtfalls. A CFP shuld utline plicies t manage a range f stress situatins, establish clear lines f respnsibility, include clear invcatin and escalatin prcedures and be regularly tested and updated t ensure that it is peratinally rbust. A credit unin s ability t withstand a liquidity funding disruptin may als depend n the calibre f its cntingency funding plans. A cntingency funding plan is a cmpilatin f plicies, prcedures and actin plans fr respnding t severe disruptins t a credit unin s ability t fund sme r all f its activities in a timely manner and at a reasnable cst. Effective cntingency funding plans cnsist f several cmpnents, including: a set f early warning indicatrs designed with the aid f liquidity testing results that identify the emergence f increased risk r vulnerabilities t a credit unin s liquidity psitin r ptential funding needs and, if necessary, initialize the applicatin f the CFP; specific prcedures t ensure timely and uninterrupted infrmatin flws t senir management; clear divisin f respnsibility within management in a crisis; actin plans fr altering asset and liability behaviurs (e.g., market assets mre aggressively, sell assets intended t hld, raise interest rates n depsits); an indicatin f the pririty f alternative surces f funds (e.g., designating primary and secndary surces f liquidity); clser, mre frequent mnitring f the effectiveness f actin plans; and plans and prcedures fr dealing with media inquiries, ntifying the Regulatr and infrming credit unin members, as necessary. Cntingency funding plans shuld als include prcedures fr making up cash flw shrtfalls in emergency situatins. Credit unins have available t them several surces f such funds, including previusly unused credit facilities. The plan shuld spell ut, as clearly as pssible, the surces and amunt f funds the credit unin expects t have available frm each surces. The develpment and nging maintenance f CFPs shuld be integrated within the credit unin s prgram fr testing liquidity risk. In ther wrds, ptential actin plans utlining the prcess fr the escalatin f the CFP can cme frm the utput f liquidity testing scenaris and, further, if a scenari is designed where the CFP wuld need t be invked, then assumptins shuld reflect this. CFPs are expected t be reviewed, tested and updated regularly (at least quarterly) t ensure effectiveness and peratinal feasibility, with the results f such tests reprted t senir management regularly and t the Bard as required. Guidance Nte: Liquidity 13

14 Internal Cntrls and Incentives Credit unins shuld have infrmatin systems in place that allw senir management and the Bard t: review cmpliance with established liquidity risk management plicies; cntrl liquidity risk expsure; and evaluate risk tlerance thrugh the use f limits, funding targets and early warning indicatrs. The limit setting and cmpliance framewrk(s) shuld be calibrated t the results f the credit unin s liquidity testing prgrams with the gal f being able t cntinue as a gingcncern. Limits shuld be peratinally effective and apprpriately calibrated in accrdance with the credit unin s stated liquidity risk tlerance (i.e., nt set s high that they are never triggered). Clearly articulated and dcumented plicies shuld describe prcedures fr: dealing with limit exceptins, permissins r authrizatin t set and change limits; ntificatin respnsibilities and escalatin prcedures; sign-ff by senir management and/r the Bard; and remedial fllw up. In rder t ensure the integrity f infrmatin reprting, credit unins shuld establish a framewrk whereby mnitring f perfrmance against limits is cnducted by parties that are peratinally independent f funding areas and ther business units. Such persnnel shuld be trained and have the infrmatin system capabilities t mnitr whether liquidity risk remains within the bunds set by senir management and the Bard. This framewrk is expected t be reviewed regularly as part f the general internal audit prcess. Fr purpses f measuring business perfrmance and maintaining prper incentives, credit unins are expected t have the capacity t assign a liquidity cst r benefit t different business activities, including new prducts, in terms f funding requirements, risks r prvisins. These csts r benefits shuld be explicitly attributed t the relevant activity and reinfrce the verarching liquidity risk tlerance f the credit unin, with a liquidity charge assigned as apprpriate t psitins, prtflis r individual transactins. This assignment f liquidity csts and benefits shuld incrprate factrs related t the anticipated hlding perids f assets and liabilities, their market liquidity risk characteristics and any ther relevant factrs. Further, in designing new prducts, a reputatin assessment shuld be made f ptential draws beynd cntractual and/r legal bligatins and ptential impacts priced directly int a prduct. Guidance Nte: Liquidity 14

15 Summary f Key Activities Key n-ging activities include: Liquidity needs shuld be reviewed n a peridic basis, but nt less frequently than mnthly. This review shuld encmpass a detailed frecast f imminent liquidity requirements. Summary measurements and analysis f liquidity needs shuld be prepared fr Bard review at each Bard meeting Scenari testing shuld be amng the measurement techniques used by a credit unin as part f its cntingency planning prcess. Credit unins shuld als include ptential liquidity requirements f its subsidiaries where apprpriate CFPs are expected t be reviewed, tested and updated regularly (at least quarterly) t ensure effectiveness and peratinal feasibility, with the results f such tests reprted t senir management regularly and t the Bard as required Annual Business Plan The fllwing infrmatin shuld be included as part f the annual business plan: a) Prjected vlume f peratinal liquidity, excess liquidity, seasnal liquidity increments, liquidity brrwings and average yield n liquid assets. This infrmatin can be cmbined with the mnthly prjectins develped fr asset/liability management planning. The plan will include narrative n actins and strategies designed t meet budget expectatins. b) Estimates f the dllar vlume and ratis f perating and excess liquidity. The prjectins f the plan will be made at least mnthly basis. This infrmatin can be cmbined with the asset/liability management prjectins in the annual business plan. Disclsure Assets held fr liquidity are required t be disclsed in the financial statements f the credit unin. It is als recmmended that infrmatin regarding the management f liquidity including plicy limits, actual liquidity levels and trends etc. are als included t the extent apprpriate fr the size and cmplexity f the credit unin. This shuld include the ttal amunt f assets held fr liquidity expressed as a percentage f ttal depsits and brrwings. Unencumbered and encumbered liquid assets shuld be separately reprted. Fr credit unins with assets in excess f $500 millin, the results f the LCR base case scenari are t be included in management s discussin and analysis prtin f the financial statements. DICO Assessment Prcess As part f its n ging review prcess, DICO undertakes an assessment f the inherent risks within each significant activity undertaken by a credit unin and evaluates the quality f risk management. DICO s review f a credit unin s liquidity management practices is used t supplement this assessment. Guidance Nte: Liquidity 15

16 As part f DICO s verall assessment, DICO will als cnsider: the extent and quality f analysis applied; the level f cnservatism in the internal estimates f the risks faced by the credit unin; the extent that material risks are fully captured by the credit unin, including bth credit unin specific and market events; the diversificatin and limits f funding surces; the extent and quality f liquidity testing prgrams, tls and techniques, and the reasnableness f assumptins used; cntemplatin f the extent t which access t different funding surces is crrelated in time f stress the extent f cntingency funding planning; and the frm and cntent f Bard reprting including discussin and analysis f liquidity testing utcmes and trends, and material cncentratins f funding surces and bligatins. This assessment will als frm part f DICO s examinatin criteria when cnsidering the quality f liquidity management plicies and practices. Guidance Nte: Liquidity 16