2009 Annual Report and Financial Statements - UBA Plc

Risk management report (continued)
LIQUIDITY RISK
Liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its fi nancial liabilities when they fall due and to
replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfi l commitments
to lend.
Liquidity risk management process
The Group’s Liquidity Risk Measurement technique is approached from two angles; the development of cash fl ow projections and ratio analysis.
The Balance Sheet Management Team uses a combination of both techniques to measure the Bank’s exposure to liquidity risk.
The cash fl ow technique is applied through the use of maturity ladder by assessing all of the Bank’s cash infl ows against its outfl ows to identify
the potential for net shortfalls or net funding requirements (i.e. a cumulative net excess or defi cit of funds) at selected maturity dates. The
maturity ladder is monitored on a day to day basis and stress testing is undertaken on a quarterly basis by applying diff erent scenarios to the
maturity ladder and assessing the Bank’s funding requirements under each scenario.
These scenarios are useful in managing the Bank’s net funding requirements under extreme cases and give an indicator as to the Bank’s
capacity for coping with less drastic internal and external problems. In creating scenarios, the Balance Sheet Management Team develops and
incorporates assumptions based on the behaviour of assets, liabilities and off -balance-sheet activities as they aff ect the cash infl ow and outfl ow
All UBA countries and subsidiaries also construct their maturity ladder and compile a monthly report based on agreed assumptions, which is
consolidated into a global report for Group ALCO review. The Country Treasurer for each subsidiary/Group Head, Balance Sheet Management
also documents the appropriate actions and includes the same into the Contingency Funding Plan (CFP) for implementation.
The Balance Sheet Management Team uses liquidity ratios to quantify liquidity. Ratios are usually expressed as either a percentage or an
equivalent amount. Liquidity ratios are not interpreted on their own but in conjunction with the outcome of the maturity ladder scenarios. The
Middle Offi ce monitors the various internal as well as market risk indicators of potential liquidity problems at the Bank. The Middle Offi ce also
monitors compliance with set internal and regulatory limits.
Country ALCO and Group ALCO controls the Bank’s exposure to liquidity risk by ensuring that limits are set and that Contingency Funding Plan
(CFP) are in place across the Group and are based on realistic assumptions.
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Annual Report 2009