PDF Ebook Audit Manual for Liquidity Risk
An objective of the liquidity risk assessment is to see whether a financial institution’s management has put an appropriate control system that can identify, measure, monitor and manage liquidity in place or not. The assessment of liquidity risk to be described in this manual is based on standards prescribed by the Basel Committee on Banking Supervision. As a result, assessor should be assured that a system implemented by a financial institution to identify, measure, monitor and control liquidity risk is appropriate and adequate for its scopes of business and degree of complexity. Large financial institutions with complicated services must have a complex risk management system which can measure all major risk levels while smaller counterparts with fewer services or uncomplicated transactions may be equipped with a risk and management and information system that is far less complicated and requires far fewer resources.
Unsound management and problems with the quality of assets are two fundamental problems which may founder the financial institutions. However, a lack of liquidity due to an inability to load off assets or seek enough cash to continue the operation may also cause financial institutions to stop businesses. Therefore, risk management is extremely important for them.
During the financial institution assessment, assessor should assess and be assured that the management has already provided enough liquidity to cope with various situations while the risk management system itself is proper enough to handle demands for funds in the future.
Contents
Section 1 Definition of Liquidity Risk
- 1.1 Definition of liquidity risk
1.2 Sources of liquidity risk
- 1.2.1 External factors
1.2.2 Internal factors
1.3 Early warning indicators of liquidity risk
1.4 Factors to reduce liquidity risk
Section 2 Guidelines for Risk Management
- 2.1 Risk identification
- 2.1.1 Sources of liquidity
2.1.2 Sources where liquidity may be used
2.1.3 Liquidity management based on the asset structure
2.1.4 Liquidity management based on the liabilities structure
- (1) Retail deposits
(2) Large deposits
(3) Funding concentrations
2.1.5 Transactions outside the balance sheet
2.1.6. Managing liquidity in foreign currencies
- (1) Review of liquidity for foreign-currency loans and credits
(2) Use of foreign-currency funds to secure local-currency assets 12
(3) Securing assets in foreign currencies
2.2 Risk measurement
- 2.2.1 Estimating cash flow and liquidity
2.2.2 Use of liquidity ratio
2.2.3 “What if” scenarios
2.3 Risk monitoring and reporting
2.3.1 Frequency of the monitoring
2.3.2 Types of reports
2.3.3 Review of assumptions
- (1) Assumption of assets
(2) Assumption of liabilities
(3) Assumption of transactions outside the balance sheet
(4) Other assumptions
2.4 Risk control
- 2.4.1 Roles of the Board of Directors of financial institution and senior executives
2.4.2 The Asset/Liability Management Committee (ALCO)
2.4.3 Management policy of assets and liabilities
2.4.4 Management structure
2.4.5 Information system
2.4.6 Determining risk limits
2.4.7 Managing market access
2.4.8 Contingency funding plans
Section 3 Guidelines for Risk Assessment
- 3.1 Objectives of the assessment
3.2 Scopes of the assessment
- 3.2.1 Assessment of risk levels
3.2.2 Assessment of risk management
- (1) Roles of the Board of Directors and senior executives
(2) Risk measurement system
(3) Risk monitoring and reporting
(4) Risk controls and limits
Section 4 Appendices
- Appendix 1 Assessment of Liquidity Risk Management Models
Appendix 2 Treasury/Investment
Appendix 3 Guidelines for Dynamic Liquidity Risk Assessment
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