Intraday liquidity management rbi

Banks To Get Intra-day Liquidity Under RTGS

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Taking into account the comments and feedback received, the guidelines on Liquidity Risk Management have been finalised which are furnished in the Annex. They include enhanced guidance on liquidity risk governance, measurement, monitoring and the reporting to the Reserve Bank on liquidity positions.

The enhanced liquidity risk management measures are required to be implemented by banks immediately. Extract from Monetary Policy Statement announced on April intraday liquidity management rbi, The draft intraday liquidity management rbi also cover two minimum global regulatory standards, viz.

While the enhanced liquidity risk management intraday liquidity management rbi are to be implemented by banks immediately after finalisation of the draft guidelines, the Basel III regulatory standards, viz.

Till then, banks will have to comply with Basel III guidelines on a best effort basis. This will prepare banks for transition to the Basel III requirements.

This assumes significance on account of the fact that liquidity crisis, even at intraday liquidity management rbi single institution, can have intraday liquidity management rbi implications. The recent events have brought to the fore several deficiencies in liquidity risk intraday liquidity management rbi by banks, which include insufficient holdings of liquid assets, funding risky or illiquid intraday liquidity management rbi portfolios with potentially volatile short term liabilities, and a lack of meaningful cash flow projections and liquidity contingency plans.

While the complete document is enclosed as Appendix Ithe broad principles for sound liquidity risk management by banks as envisaged by BCBS are as under:.

A bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion intraday liquidity management rbi unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. A bank should clearly articulate a liquidity risk tolerance that is appropriate for its business strategy and its role in the financial system.

Senior management should develop a strategy, policies and practices to manage liquidity risk in accordance with the risk tolerance and to ensure that the bank maintains sufficient liquidity. A bank should incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval process for all significant business activities both on- and off-balance sheetthereby aligning the risk-taking incentives of individual business lines with the liquidity risk exposures their activities create for the bank as a whole.

A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows intraday liquidity management rbi from assets, liabilities and off-balance sheet items over an appropriate set of time horizons. A bank should actively monitor and control liquidity risk exposures and funding needs within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity.

A bank should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds intraday liquidity management rbi to promote effective diversification of funding sources. A bank should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid.

A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. A bank should actively manage its collateral positions, differentiating between encumbered and unencumbered assets.

A bank should monitor intraday liquidity management rbi legal entity and physical location where collateral is held and how it may be mobilised in a timely manner. A bank should use stress test outcomes to adjust its liquidity risk management strategies, policies, and positions and to develop effective contingency plans. A bank should have a formal contingency funding plan CFP that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations.

A CFP should outline policies to manage a range of stress environments, establish clear lines of responsibility, include clear invocation and escalation procedures and be regularly tested and updated to ensure that it is operationally robust.

A bank should maintain a cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios, including those that involve the loss or impairment of unsecured and typically available secured funding sources. There should be no legal, intraday liquidity management rbi or operational impediment to using these assets to obtain funding.

A bank should publicly disclose information on a regular basis that enables market participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position. The BoD should review intraday liquidity management rbi strategy, policies and practices at least annually. A CFP should delineate policies to manage a range of stress environments, establish clear lines of responsibility, and articulate clear implementation and escalation procedures.

Successful implementation of any risk management process has to emanate from the top management intraday liquidity management rbi the bank with the demonstration of its strong commitment to integrate basic operations and strategic decision making with risk management.

Ideally, the organisational set up for liquidity risk management should be as under:. The BoD should have the overall responsibility for management of liquidity risk. The risk tolerance should be clearly understood at all levels of management. The potential interaction of liquidity risk with other risks should also be included in the risks addressed by the risk management committee. In addition, the Head of the Technology Division should also be an invitee for building up of MIS and related computerization.

Some banks may even have Sub-Committees and Support Groups. The size number of members of ALCO would depend on the size of each institution, business mix and organizational complexity. The role of the ALCO with respect to the liquidity risk should include, inter aliathe following: Deciding on source and mix of liabilities or sale of assets. Ensuring operational independence of Liquidity Risk Management function, with adequate support of skilled and experienced officers.

Reviewing the stress test scenarios including the assumptions as well as the results of the stress tests and ensuring that a well documented contingency funding plan is in place which is reviewed periodically.

Regularly reporting to the BoD and Risk Management Committee on the liquidity risk profile of the bank. Liquidity risk can often arise from perceived or actual weaknesses, failures or problems in the management of other risk types.

It should, therefore, identify events that could have an impact on market and public perceptions about its soundness and reputation. The policy should also intraday liquidity management rbi liquidity separately for individual currencies, legal entities like subsidiaries, joint ventures and associates, and business lines, when appropriate and material, and should place limits on transfer of liquidity keeping in view the regulatory, legal and operational constraints.

The BoD or its delegated committee of board members should oversee the establishment and approval of policies, strategies and procedures to manage liquidity risk, and review them at least annually. Strategies should identify primary sources of funding for meeting daily operating cash outflows, as well as expected and unexpected cash flow fluctuations.

A bank should have a sound process for identifying, measuring, monitoring and mitigating liquidity risk as enumerated below: Liquidity can be measured through stock and flow approaches. Flow approach measurement involves comprehensive tracking of cash flow mismatches. For measuring and managing net funding requirements, the format prescribed by the RBI i. The cash flows are required to be placed in different time bands based on the residual maturity of the cash flows or the projected future behaviour of assets, liabilities and off-balance sheet items.

Presently, banks are required to prepare domestic structural liquidity statement Rupee on a daily basis and report to RBI on a fortnightly basis. Further, structural liquidity statements in respect of overseas operations are also reported to RBI on quarterly basis. The structural liquidity statement has been revised and the revised formats of the statement and the guidance intraday liquidity management rbi slotting the future cash flows of banks in the time buckets are furnished as Appendix II Refer Liquidity Return, Part A1 and Appendix IVArespectively.

The revised formats of statements of Structural Liquidity include five parts, viz. The behavioural analysis, for example, may include the proportion of maturing assets and liabilities that the bank can rollover or renew, the behavior of assets and liabilities with no clearly specified maturity dates, potential cash flows from off-balance sheet activities, including draw down under loan commitments, contingent liabilities and market related transactions.

Banks should undertake variance analysis, at least once in six months to validate the assumptions used in the behavioral analysis. Thus, cash outflows can be ranked by the date on which liabilities fall due, the earliest date a liability holder could exercise an early repayment option or the earliest date contingencies could be crystallised.

Certain critical ratios in respect of liquidity risk management and their significance for banks are given in the Table 1 below. Banks may monitor these ratios by putting in place an internally defined limit approved by the Board for these ratios. The industry averages 1 for these ratios are given for information of banks. They may fix their own limits, based on their liquidity risk management capabilities, experience and profile.

The stock ratios are meant for monitoring the liquidity risk at the solo bank level. Banks may also apply these ratios for monitoring liquidity risk in major currencies, viz. Since the numerator represents short-term, interest sensitive funds, a high and positive number implies some risk of illiquidity. Measure the extent to which illiquid assets are financed out of core deposits. Measures the extent of available liquid assets.

A higher ratio could impinge on the asset utilisation of banking system in intraday liquidity management rbi of opportunity cost of holding liquidity. Measures the cover of liquid investments relative to volatile intraday liquidity management rbi.

A ratio of less than 1 indicates the possibility of a liquidity problem. For example to identify unstable liabilities and liquid asset coverage ratios banks may include ratios of wholesale funding to total liabilities, potentially volatile retail e.

While the mismatches in the structural liquidity statement up to one year would be relevant since these provide early warning intraday liquidity management rbi of impending liquidity problems, the main focus intraday liquidity management rbi be on the short-term mismatches viz.

Banks may also adopt the above cumulative mismatch limits for their structural liquidity statement for consolidated bank operations Appendix II — Part C. In order to enable banks to monitor their short-term liquidity on a dynamic basis over a time horizon spanning from days, banks are required to estimate their short-term liquidity profiles on the basis of business projections and other commitments for planning purposes as per the indicative format on estimating Short-Term Dynamic Liquidity prescribed by the RBI in its circular DBOD.

The statement has been revised and the revised format is furnished as Appendix III. This will cover both domestic operations and overseas branch operations jurisdiction wise and overall of the bank.

While estimating the liquidity profile in a dynamic intraday liquidity management rbi, due importance may be given to the:. Potential liquidity needs for meeting new loan demands, unavailed credit limits, devolvement of contingent liabilities, potential deposit losses, investment obligations, statutory obligations, etc. Banks are required to adhere to the following regulatory limits prescribed to reduce the extent of concentration on the liability side of the banks.

However, individual banks may, with the approval of their BoDs, fix a lower limit for their inter-bank liabilities, keeping in view their business model. The limit prescribed above will include only fund based IBL within India including inter-bank liabilities in foreign currency to banks operating within India.

In other words, the IBL outside India are excluded. Banks having high concentration of wholesale deposits wholesale deposits for this intraday liquidity management rbi would be Rs. Banks should also evolve a system for monitoring high value deposits other than inter-bank deposits say Rs. The management of liquidity risks relating to certain off-balance sheet exposures on account of special purpose vehicles, financial derivatives, and guarantees and commitments may be given particular importance due to the difficulties that many banks have in assessing the related liquidity risks that could materialise in times of stress.

Thus, the cash flows arising out of contingent liabilities in normal situation and the scope for increase in cash flows during periods of stress should also be estimated and monitored. In case of securitization transactions, an originating bank should monitor, at the inception and throughout the life of the transaction, potential risks arising from the extension of liquidity facilities to securitisation programmes.

This is particularly true of securitisation programmes where the bank considers such intraday liquidity management rbi critical to maintaining ongoing access to funding. Similarly, in times of stress, reputational concerns might prompt a bank to purchase assets from money market or other investment funds that it manages or with which it is otherwise affiliated. A bank should also consider the potential for operational and liquidity disruptions that could necessitate the pledging or delivery of additional intra-day collateral.

A bank should have proper systems and procedure to calculate all of its collateral positions in a timely manner, including the value of assets currently pledged relative to the amount of security required and unencumbered assets available to be pledged and monitor them on an ongoing basis. A bank should also be aware of the operational and timing requirements associated with accessing the collateral given its physical location.

In the face of credit concerns or general market stress, counterparties may view the failure to settle payments as a sign of financial weakness and intraday liquidity management rbi turn, withhold or delay payments to the bank causing additional liquidity pressures.

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Initially pioneered by financial institutions during the s as interest rates became increasingly volatile, asset and liability management often abbreviated ALM is the practice of managing risks that arise due to mismatches between the assets and liabilities.

The process is at the crossroads between risk management and strategic planning. It is not just about offering solutions to mitigate or hedge the risks arising from the interaction of assets and liabilities but is focused on a long-term perspective: Thus modern ALM includes the allocation and management of assets, equity, interest rate and credit risk management including risk overlays, and the calibration of firmwide tools within these risk frameworks for optimisation and management in the local regulatory and capital environment.

Often an ALM approach passively matches assets against liabilities fully hedged and leaves surplus to be actively managed. The exact roles and perimeter around ALM can vary significantly from one bank or other financial institutions to another depending on the business model adopted and can encompass a broad area of risks. The traditional ALM programs focus on interest rate risk and liquidity risk because they represent the most prominent risks affecting the organization balance-sheet as they require coordination between assets and liabilities.

But ALM also now seeks to broaden assignments such as foreign exchange risk and capital management. The ALM function scope covers both a prudential component management of all possible risks and rules and regulation and an optimization role management of funding costs, generating results on balance sheet position , within the limits of compliance implementation and monitoring with internal rules and regulatory set of rules.

ALM intervenes in these issues of current business activities but is also consulted to organic development and external acquisition to analyse and validate the funding terms options, conditions of the projects and any risks i.

Today, ALM techniques and processes have been extended and adopted by corporations other than financial institutions; e. For simplification treasury management can be covered and depicted from a corporate perspective looking at the management of liquidity, funding, and financial risk.

On the other hand, ALM is a discipline relevant to banks and financial institutions whose balance sheets present different challenges and who must meet regulatory standards.

For banking institutions, treasury and ALM are strictly interrelated with each other and collaborate in managing both liquidity, interest rate, and currency risk at solo and group level: Where ALM focuses more on risk analysis and medium- and long-term financing needs, treasury manages short-term funding mainly up to one year including intra-day liquidity management and cash clearing , crisis liquidity monitoring. The vast majority of banks operate a centralised ALM model which enables oversight of the consolidated balance-sheet with lower-level ALM units focusing on business units or legal entities.

It has the central purpose of attaining goals defined by the short- and long-term strategic plans:. Relevant ALM legislation deals mainly with the management of interest rate risk and liquidity risk:. Note that the ALM policy has not the objective to skip out the institution from elaborating a liquidity policy.

In any case, the ALM and liquidity policies need to be correlated as decision on lending, investment, liabilities, equity are all interrelated. The objective is to measure the direction and extent of asset-liability mismatch through the funding or maturity gap. This aspect of ALM stresses the importance of balancing maturities as well as cash-flows or interest rates for a particular set time horizon.

For the management of interest rate risk it may take the form of matching the maturities and interest rates of loans and investments with the maturities and interest rates of deposit, equity and external credit in order to maintain adequate profitability. In other words, it is the management of the spread between interest rate sensitive assets and interest rate sensitive liabilities..

Gap analysis suffers from only covering future gap direction of current existing exposures and exercise of options i. Dynamic gap analysis enlarges the perimeter for a specific asset by including 'what if' scenarios on making assumptions on new volumes, changes in the business activity, future path of interest rate, changes in pricing, shape of yield curve, new prepayments transactions, what its forecast gap positions will look like if entering into a hedge transaction This aspect of liquidity risk is named funding liquidity risk and arises because of liquidity mismatch of assets and liabilities unbalance in the maturity term creating liquidity gap.

Even if market liquidity risk is not covered into the conventional techniques of ALM market liquidity risk as the risk to not easily offset or eliminate a position at the prevailing market price because of inadequate market depth or market disruption , these 2 liquidity risk types are closely interconnected.

In fact, reasons for banking cash inflows are:. Measuring liquidity position via liquidity gap analysis is still one of the most common tool used and represents the foundation for scenario analysis and stress-testing. To do so, ALM team is projecting future funding needs by tracking through maturity and cash-flow mismatches gap risk exposure or matching schedule. In that situation, the risk depends not only on the maturity of asset-liabilities but also on the maturity of each intermediate cash-flow, including prepayments of loans or unforeseen usage of credit lines.

In dealing with the liquidity gap, the bank main concern is to deal with a surplus of long-term assets over short-term liabilities and thus continuously to finance the assets with the risk that required funds will not be available or into prohibitive level.

As these instruments do not have a contractual maturity, the bank needs to dispose of a clear understanding of their duration level within the banking books. This analysis for non-maturing liabilities such as non interest-bearing deposits savings accounts and deposits consists of assessing the account holders behavior to determine the turnover level of the accounts or decay rate of deposits speed at which the accounts 'decay', the retention rate is representing the inverse of a decay rate.

The crisis however has evidence fiercely that the withdrawal of client deposits is driven by two major factors level of sophistication of the counterparty: But daily completeness of data for an internationally operating bank should not represent the forefront of its procupation as the seek for daily consolidation is a lengthy process that may put away the vital concern of quick availability of liquidity figures.

So the main focus will be on material entities and business as well as off-balance sheet position commitments given,movements of collateral posted For the purposes of quantitative analysis, since no single indicator can define adequate liquidity, several financial ratios can assist in assessing the level of liquidity risk. Due to the large number of areas within the bank's business giving rise to liquidity risk, these ratios present the simpler measures covering the major institution concern.

In order to cover short-term to long-term liquidity risk they are divided into 3 categories:. Indication of how much available cash the bank has to meet share withdrawals or additional loan demand. Help to gauge the bank's liquidity in the short-term as how well current liabilities are covered by the cash-flow generated by the bank thus shows its ability to meet near future expenses without to sell assets.

Adjustement of the current ratio to eliminate no-cash equivalent assets inventory and indicate the size of the buffer of cash.

Measure of the bank's current position of how much long term earning assets more than one year are funded with non core funds net short term funds: The lower the ratio the better. Measurement of the extent to which assets are funded through stable deposit base.

Simplified indication on the extent to which a bank is funding liquid assets by stable liabilities. Indication that the bank can effectively meet the loan demand as well as other liquidity needs.

As an echo to the deficit of funds resulting from gaps between assets and liabilities the bank has also to address its funding requirement through an effective, robust and stable funding model. Today, banking institutions within industrialized countries are facing structural challenges and remain still vulnerable to new market shocks or setbacks:.

After , financial groups have further improved the diversification of funding sources as the crisis has proven that limited mix of funds may turn out to be risky if these sources run dry all of a sudden. The asset contribution to funding requirement depends on the bank ability to convert easily its assets to cash without loss. From customers and small businesses and seen as stable sources with poor sensitivity level to market interest rates and bank's financial conditions.

This plan needs to embrace all available funding sources and requires an integrated approach with the strategic business planning process. The objective is to provide realistic projection of funding future under various set of assumptions. Dependencies to endogenous bank specific events such as formulas, asset allocation, funding methods This reserve can also referred to liquidity buffer and represents as the first line of defense in a liquidity crisis before intervention of any measures of the contingency funding plan.

It consists of a stock of highly liquid assets without legal, regulatory constraints the assets need to be readily available and not pledged to payments or clearing houses, we call them cashlike assets.

As the bank should not assume that business will always continue as it is the current business process, the institution needs to explore emergency sources of funds and formalise a contingency plan. The purpose is to find alternative backup sources of funding to those that occur within the normal course of operations.

Dealing with Contingency Funding Plan CFP is to find adequate actions as regard to low-probability and high-impact events as opposed to high-probability and low-impact into the day-to-day management of funding sources and their usage within the bank.

These aspects can be expressed as the inability:. This assessment is realised in accordance with the bank current funding structure to establish a clear view on their impacts on the 'normal' funding plan and therefore evaluate the need for extra funding. This quantitative estimation of additional funding resources under stress events is declined for:.

In addition, analysis are conducted to evaluate the threat of those stress events on the bank earnings, capital level, business activities as well as the balance sheet composition. The last key aspect of an effective Contingency Funding Plan relates to the management of potential crisis with a dedicated team in charge to provide:. The objective is to settle an approach of the asset-liabilitiy profile of the bank in accordance with its funding requirement. In fact, how effectively balancing the funding sources and uses with regard to liquidity, interest rate management, funding diversification and the type of business-model the bank is conducting for example business based on a majority of short-term movements with high frequency changement of the asset profile or the type of activities of the respective business lines market making business is requiring more flexible liquidity profile than traditional bank activities.

Funding report summarises the total funding needs and sources with the objective to dispose of a global view where the forward funding requirement lies at the time of the snapshot.

The report breakdown is at business line level to a consolidatedone on the firm-wide level. This is the concept of Fund Transfer Pricing FTP a process within ALM context to ensure that business lines are funded with adequate tenors and that are charged and accountable in adequation to their current or future estimated situation.

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