MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4408.12.313. Address administrative policiesand procedures that should be used duringa liquidity crisis:• The responsibilities of SeniorManagement during a funding crisis• Names, addresses, and telephonenumbers of members of the crisis team• Where, geographically, teammembers will be assigned• Who will be assigned responsibilityto initiate external contacts with regulators,analysts, investors, external auditors, press,significant customers, and others• How internal communications willflow between management, Asset LiabilityCommittee (ALCO), investment portfoliomanagers, traders, employees, and others• How to ensure that the ALCOreceives management reports that arepertinent and timely enough to allowmembers to understand the severity of theFI’s circumstances and to implementappropriate responses.The above outline of the scope of agood contingency plan is by no meansexhaustive. FIs should devote significanttime and consideration to scenarios that aremost likely, given their activities.Regardless of the strategies employed, anFI should consider the effects of suchstrategies on long-term liquidity positionsand take appropriate actions to ensure thatlevel of risk exposures shall remain or bebrought down within the risk tolerance ofthe Board.Limits structureThe board and senior managementshould establish limits on the nature andamount of liquidity risk they are willing toassume. In setting limits, managementshould consider the nature of the FI’sstrategies and activities, its pastperformance, the level of earnings andcapital available to absorb potential lossesand costs of an FI’s access to moneymarkets and other alternative sources offunding.Limits can take various forms. FIsshould address limits on types of fundingsources and uses of funds, including offbalancesheet positions. In addition,policies should set targets for minimumholdings of liquid assets relative toliabilities. Complex FIs, or FIs engaged incomplex activities should set maximumcumulative cash-flow mismatches overparticular time horizons and establishcounterparty limits. Such limits should beapplied to all currencies to which the FIhas a significant exposure. In particular, FIsshould take into consideration any legaldistinctions and possible obstacles to cashflow movements between the RegularBanking Unit (RBU) and the FCDU.When evaluating a bank’s liquidityposition, the BSP will consider low levelsof liquid assets relative to liabilities, andsignificant negative funding gaps to beindicative of high liquidity risk exposure.Further, negative cash-flow mismatches inthe short term time buckets will receiveheightened scrutiny by the BSP and shouldalso receive the attention of seniormanagement and the board of directors.Before accepting negative fundinggaps, or setting limits that allow negativefunding gaps, the board and seniormanagement should consider the FI’sability to fund these negative gaps. Factorsinclude, but are not limited to: theavailability of on-balance sheet liquidity,the amount of firm credit lines availablefrom commercial sources that can bedrawn to fund the shortfall, and the amountof unencumbered on-balance sheet assetsthat can be sold without excessive loss andin a reasonable time-frame.Further, actual positions and limitsshould reflect the outcome of possiblestress scenarios caused by internal andexternal factors, particularly those relatedto reputation risk. Stress scenarios shouldconsider the possibility that securities maybe sold at a greater discount and/or maytake more time to sell than expected orQ RegulationsAppendix Q-44 - Page 8Manual of Regulations for Non-Bank Financial Institutions