MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4408.12.316. The adequacy of measurementmethodologies, monitoring andmanagement information systems;7. The adequacy of foreign currencyliquidity management;8. The appropriateness andreasonableness of contingency plans forhandling liquidity crises;9. The adequacy of internal controlsand audit of liquidity risk managementprocess.The sophistication of liquidity riskmanagement shall depend on the size,nature and complexity of an FI’s activities.However, in all instances, FIs areexpected to measure their liquidityposition on an ongoing basis, analyze netfunding requirements under alternativescenarios, diversify funding sources andadopt contingency funding plans.An FI’s liquidity risk managementsystem shall be assessed under the FI’sgeneral risk management framework,consistent with the guidelines onsupervision by risk as set forth underAppendix Q-42. If an FI’s risk exposuresare deemed excessive relative to the FI’scapital, or that the risk assumed is not wellmanaged, the BSP will direct the FI toreduce its exposure and/or strengthen itsrisk management system.III. Liquidity Risk Management ProcessLiquidity risk management processshould be tailored to an FI’s structure andscope of operations and application canvary across institutions. Regardless of thestructure, an FI’s liquidity riskmanagement process should beconsistent with its general riskmanagement framework and should becommensurate with the level of riskassumed. At a minimum, the processshould:1. Identify liquidity risk. Properidentification of liquidity risk requires thatmanagement understand both existingrisk and prospective risks from newproducts and activities. It involvesdetermining the volume and trends ofliquidity needs and the sources of liquidityavailable to meet these needs. Identifyingliquidity risk necessitates expressing theFI’s desired level of risk exposure basedon its ability and willingness to assumerisk which may primarily depend on theFI’s capital base and access to fundsproviders. Liquidity risk identificationshould be a continuing process and shouldoccur at both the transaction, portfolio andentity level.2. Measure liquidity risk. Adequatemeasurement systems enable FIs toquantify liquidity risk exposures on a perentity basis and across the consolidatedorganization. A relatively largeorganization with extensive scope ofoperations would generally require amore robust management informationsystem to properly measure risk in atimely and comprehensive manner.3. Control liquidity risk. The FIshould establish policies and standards onacceptable product types, activities,counterparties and set risk limits on atransactional, portfolio and aggregate/consolidated basis to control liquidity risk.In setting limits, the FI should recognizeany legal distinctions and possibleobstacles to cash flow movementsamong affiliates or across separate books.Lines of authority and accountabilityshould be clearly defined to ensureliquidity risk exposures remainreasonable and within the risk toleranceexpressed by the board.4. Monitor liquidity risk. Monitoringliquidity risk requires timely review ofliquidity risk positions and exceptions,including day-to-day liquiditymanagement. Monitoring reportsshould be frequent, timely, and accurateand should be distributed to appropriatelevels of management.Q RegulationsAppendix Q-44 - Page 2Manual of Regulations for Non-Bank Financial Institutions