Banking Regulators Issue Liquidity Risk Management Guidelines
Banking agencies including the Federal Reserve issued a joint policy statement in March addressing depository institutions' funding and liquidity risk practices. The new guidelines, adopted by each of the agencies and the Conference of State Bank Supervisors, provide a consistent explanation of supervisors' expectations with respect to liquidity risk management.
Diverse funding, stress tests key to liquidity risk management
Recent financial market turmoil has highlighted the importance of liquidity risk management to financial institutions' safety and soundness, said the statement. Included in the guidelines were a number of tools depository institutions can use to measure and manage liquidity risk, including diversifying funding sources, conducting stress tests, and maintaining adequate cushions of liquid assets such as U.S. Treasury securities or excess reserves at the central bank.
The guidelines detailed other key elements of effective liquidity risk management, such as accurate cash flow projections and a comprehensive contingency funding plan.
"The agencies expect each financial institution to manage funding and liquidity risk using processes and systems that are commensurate with the institution's complexity, risk profile, and scope of operations," the statement said.
Liquidity risk plays role in broader risk management
The guidelines emphasize the important role bank leaders should play in effective liquidity risk management. Among other things, bank boards of directors should make sure that the institution's liquidity risk tolerance is clearly understood by all levels of management and that the appropriate processes are in place to manage liquidity risk. Further, the guidelines state that "because of the critical importance to the viability of the institution, liquidity risk management should be fully integrated into the institution's risk management processes."
April 13, 2010