MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4408.12.31Liquidity risk measurement models/methodologiesAn FI should have a measurementsystem in place capable of quantifying andcapturing the main sources of liquidity riskin a timely and comprehensive manner.Liquidity management requires ongoingmeasurement, from intra-day liquidity tolong-term liquidity positions. Dependingon its risk profile, an FI can use techniquesof simple calculations, static simulationsbased on current holdings or sophisticatedmodels. What is essential is that the FIshould be able to identify and avoidpotential funding shortfalls such that the FIcan consistently meet investment, fundingand/or strategic targets.FIs with simple operations cangenerally use a static approach to liquiditymanagement. Static models are based onpositions at a given point in time. Whilean exact definition of “simple operations”will not be provided, the BSP expects thatbanks using a static approach to liquiditymanagement would limit their operationsto core banking activities such as acceptingplain vanilla deposits and makingtraditional loans. Such banks would nothave active Treasury Departments, wouldnot hold or offer structured products andwould not be exposed to significant levelsof FX risk. Board reporting could be lessfrequent than in more complex banks butin no event should be less than quarterly.Complex FIs, on the other hand, willbe expected to adopt more robustapproaches such as a dynamic maturity/liquidity gap reporting or even simulationmodeling. At a minimum, universal banksshould use maximum cash outflow/liquidity or maturity gap models. FIsengaged in holding or offering significantlevels of structured products and/orderivatives will be expected to have thecapability to model the cash flows fromthese instruments under a variety ofscenarios. Specifically, scenarios should bedesigned to measure the effects of a breachof the triggers (strike price) on theseinstruments.Where the FI’s organizational structureand business practices indicate cash flowmovements and liquidity support amongcorporate group members, the FI shouldadopt consolidated risk measurement toolsto help management assess the group’sliquidity risk exposure. Depending on thedegree of inter-related funding, noncomplexmeasurement and monitoringsystems may be acceptable. However,large, complex FIs that display a highdegree of inter-related and inter-dependentfunding will be expected to utilize moresophisticated monitoring and managementsystems. These systems should enable theBoard of the consolidated entity to simulateand anticipate the funding needs of the FIson both a consolidated basis and in eachof its component parts.Liquidity risk measurementmethodologies/models should bedocumented and approved by the boardand should be periodically independentlyreviewed for reasonableness and tested foraccuracy and data integrity. Assumptionsused in managing liquidity should beperiodically revisited to ensure that theseremain valid.Liquidity models require projecting allrelevant cash flows. As such, FIs engagedin complex activities should have thecapability to model the behavior of allassets, liabilities, and off-balance sheetitems both under normal/business-as usualand a variety of stressed conditions.Stressed conditions may include liquiditycrisis confined within the institution, or asystemic liquidity crisis, in which all FIsare affected. For FIs operating in a globalenvironment, cash flow projections shouldreflect various foreign-currency fundingrequirements.When projecting cash flows,management should also estimateQ RegulationsAppendix Q-44 - Page 6Manual of Regulations for Non-Bank Financial Institutions