Liquidity policy - quick guide

Published: 30th July 2010 by William Webster

Societies should have a liquidity policy statement. This should include strategies, policies, processes and systems that manage liquidity risk and liquidity risk tolerance. This document needs to be approved by the board; it should be regularly updated and fit in with the strategic plan. There should be sections on:

1. An introduction section

Background to the society's approach to liquidity risk management
The Board approval process
Frequency of review

2. Objectives section

This should include the purpose of liquid assets and whether the firm operates under simplified or standard ILAS.

3. Operational section

This should explain the society's business and how it impacts on the need for liquidity in treasury and the liquidity being held net of mortgage commitments as a percentage of SDLs.

4. Risk management section

Controls and limits on countries, sectors, counterparties and brokers

How credit ratings are used. The minimum acceptable rating. Other information used in the credit decision process

Policy of assessment for un-rated investments

Operational and settlement risk, board authorisations, delegation, dealer limits, confirmation processes and segregation of duties

Policy on repo and reverse repo

The procedures for overriding these limits and controls

How information is reported to the board

5. Maturity Section

This should provide a clear view of the maturity of treasury investments. Simplified ILAS firms should be able to measure and manage the peak cumulative wholesale outflows over 3 months in order that sufficient buffer is maintained.

Asset Categories:

Assets held in the liquidity buffer

Society and local authority deposits

Repo

Mortgage backed securities, covered bonds

Commercial paper

Bank deposits and CDs

Collateral eligible at the Bank of England

There should also be policy/explanation on:

Clearing systems and depository usage, standby facilities, external professional advisors and custody arrangements.

If business risks and controls are not in alignment with the FSA's expectations plans will be required to adjust the society's risk management and/or business strategy.

For detailed guidance refer to FSA Policy Statement 10/5 A specialist sourcebook for building societies, Section 3: Treasury investments and liquidity risk management.

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Related Documents

Funding policy - quick guide

30th July 2010

Building societies are expected to have an up to date funding policy statement. This will need board approval. What should your funding policy contain? NEDs may find this guide helpful.

Regulation > Policy Statement 09/16 Stengthening liquidity standards October 2009

7th November 2009

Policy Statement 09/16 Strengthening liquidity standards refers to earlier consultation papers CP08/22, CP09/13 and CP09/14 and the comments received. In general whilst the FSA acknowledges many of the issues raised little has altered in the final policy. Firms will be expected to be self sufficient for liquidity purposes. Senior management is responsible for reviewing the level of liquidity, compliance and reporting to the Board. The FSA highlights that many firms have been unable to identify and report contractual cash flows on a regular basis. This will be unacceptable. Non compliance will be treated with regulatory sanction. How a firm is subject to Individual Liquidity Adequacy Standards (ILAS) depends on the size of the firm and the risks it presents. The ILAS framework comprises an Individual Liquidity Adequacy Assessment (ILAA), a Supervisory Liquidity Review Process (SLRP) and Individual Liquidity Guidance (ILG). Firms are obliged in the ILAA to undertake robust stress testing. The purpose of this is to show that the firm fully understands its liquidity risk. ILAS firms will need to report the stress test results in their ILAA. Liquidity management systems, controls and stress testing are all board responsibilities. The ILG is the amount of liquid resources the FSA expects a firm to hold. This will contain "guidance" on the amount of the liquid asset buffer and the firm's funding profile. As an incentive for firms to improve their systems and controls, the FSA will increase the amount of liquidity the firm must hold. Deposits at the central bank and tradable securities issued by the central bank will count towards the buffer. Holding currency denominated bonds should take into account potential problems in the FX market. For this reason a domestic bank with mainly sterling liabilities must hold its buffer in gilts. The FSA now require firms to price the cost of liquidity into products. This should mean that the cost of holding the liquidity buffer is passed on to those customers that create a stressed outflow requirement. The new regime will be phased in. The scope and application of the new rules will depend on the importance of the firm and its ability to create systemic risk.

PS 10 5 presentation January 2010

15th January 2010

This presentation is about the introduction of new liquidity standards in the UK. It was delivered to bank and building society executives and NEDs in January 2010.

Treasury management for building societies

21st August 2010

Liquidity Risk Course

Regulation > CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures June 2009

29th June 2009

The FSA presumes that every firm must be self sufficient for liquidity purposes unless a waiver is granted. The systems and controls requirement applies to all firms from Q4 2009 and will have no phased or transitional introduction. This is a summary of the CP.