Mots-clefs

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The liquidity management should include a liquidity contingency plan, scenario planning and testing of the plan. But little guidance can be found on what liquidity warning indicators should be monitored and what explicit strategic action should be tested. This is why I have summarised the points below.

Warning indicators

The purpose of early warning indicators is to alert management to the possibility of an impending liquidity crisis so that action can be taken quickly and early enough to avert it. Their monitoring may include:

  • On the liability side:
    • unexpected and significant levels of withdrawals of retail deposits or non-renewal of wholesale funding facilities;
    • core retail deposit volumes falling below projected levels; and
    • a shortening of deposit maturities and a rise in requests to break fixed term deposits.
  • On the asset side:
    • retail advances growing faster than projected;
    • a lengthening of loan maturities;
    • larger than expected drawdown of committed facilities;
    • a significant rise in undrawn committed facilities;
    • a rise in defaults and delinquencies; and
    • prepyments of loan facilities falling below historic behavioural norms.

Strategies to Test

The steps that can be taken to improve liquidity and on which one should have a sound idea on how the market reacts include:

  • raising retail deposit interest rates;
  • raising loan interest rates to discourage new borrowings and stabilise the balance sheet;
  • usage of potential sources of funds;
  • transferring liquidity to the affected group entity;
  • capping balance sheet growth; increasing  on the offered products; and
  • issuing of public statements (both locally and internationally) to deal with reputation risk.

The contingency funding plan should test:

  • outright sales, or sales under repurchase agreements, of marketable assets;
  • drawdown of committed facilities;
  • funding from other group entities;
  • contingent liquidity swaps.

Also, customers may withdraw fixed term or notice deposits under interest penalty and one should factor these balances in.

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