MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4408.12.31GUIDELINES ON LIQUIDITY RISK MANAGEMENT[Appendix to Sec. 4175Q (2008 - 4195Q), 4195S, 4195P and 4195N]I. BackgroundThe on-going viability of institutions,particularly financial organizations, isheavily influenced by their ability tomanage liquidity. Innovations ininvestment and funding products, growthin off-balance sheet activities andcontinuous competition for consumerfunds have affected the way FI do businessand intensified the need for proactiveliquidity risk management. FIs need to fullyunderstand, measure and control theresulting liquidity risk exposures.II. Statement of PolicyFor purposes of these guidelines, FIsinclude banks, NBFIs supervised by theBSP and their financial subsidiaries.The BSP recognizes the liquidity riskinherent in FI activities and how theseactivities expose an FI to multiple riskswhich may increase liquidity risk. The BSPwill not restrict risk-taking activities as longas FIs are authorized to engage in suchactivities and:1. Understand, measure, monitor andcontrol the risk they assume;2. Adopt risk management practiceswhose sophistication and effectiveness iscommensurate to the risk assumed; and3. Maintain capital commensuratewith their risk exposures.The principles set forth in theseguidelines shall be used to determine thelevel and trend of liquidity risk exposureand adequacy and effectiveness of an FI’sliquidity risk management process. Inevaluating the adequacy of an FI’s liquidityposition, the BSP shall consider the FI’scurrent level and prospective sources ofliquidity as compared to its funding needs.Further, the BSP will evaluate theadequacy of funds management practicesrelative to the FI’s size, complexity, andrisk profile.In general, liquidity risk managementpractices should ensure that an institutionis able to maintain a level of liquiditysufficient to meet its financial obligationsin a timely manner and to fulfill thelegitimate funding needs of its community.Practices should reflect the ability of theinstitution to manage unplanned changesin funding sources, as well as react tochanges in market conditions that affectthe ability to quickly liquidate assets withminimal loss. In addition, fundsmanagementpractices should ensure thatliquidity is not consistently maintained ata high cost, from concentrated sources, orthrough undue reliance on funding sourcesthat may not be available in times offinancial stress or adverse changes inmarket conditions.In evaluating the above parameters,the BSP shall consider the following factors:1. The actual and potential level ofliquidity risk posed by the FI’s products andservices, balance sheet structure and offbalancesheet activities;2. The cost of an FI’s access to moneymarkets and other alternative sources offunding;3. The diversification of fundingsources (on and off-balance sheet);4. The adequacy and effectiveness ofboard and senior management oversight,particularly the Board’s ability to recognizethe effects of interrelated risk areas, suchas market and reputation risks, to liquidityrisk;5. The reasonableness of liquidity risklimits and controls in relation to earnings,as affected by the cost of access to moneymarkets and other alternative sources offunding, and capital;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 1