Liquidity and funding risk is understood by ING Bank Śląski S.A. as a risk consisting in inability to fulfil, at a reasonable price, cash liabilities under balance sheet and off-balance sheet items. The Bank maintains liquidity so that the Bank’s cash liabilities could be met at all times with the use of available funds and inflows from maturing transactions.
The liquidity risk management can be broken down as follows depending on the timeframe:
- Operational liquidity management – focused on current funding of Bank’s positions and management of nostro positions,
- Strategic liquidity management – focused on ensuring that structural (all maturity dates) liquidity items of the Bank were at acceptable levels.
General approach to liquidity risk management
General approach to funding and liquidity risk management consists of the cycle of five repetitive actions: risk identification, assessment, control, monitoring and reporting.
The currently binding Internal Liquidity Adequacy Assessment Process (ILAAP) originates from the Basel Committee on Banking Supervision. Meeting ILAAP principles by the Bank may be perceived as “compliance with industry’s best practices, which is not directly required under Polish supervisory regulations”. It needs to be highlighted that ILAAP and Polish regulations do not clash, on the contrary, they do overlap in many areas. Meeting ILAAP requirements is compliant with the ING Bank N.V. policy.
The liquidity and funding risk management related to the stress understood as risk of Bank’s inability to satisfy its own financial liabilities once they mature due to insufficient funds available or due to failure to generate such funds at any price consists a specific element of the process.
The contingency funding plan which provides guidance as regards active identification of the liquidity crisis and actions to be taken to survive it.
The acceptable level of liquidity risk is defined by a two-element system:
- general level of Bank’s acceptable risk, which is approved by the Supervisory Board (following the Bank Management Board’s recommendation). The Supervisory Board are updated on compliance with the said measurements at least on a quarterly basis,
- a set of limits based on Bank’s strategic objectives, identified liquidity risks and principles specified by regulatory bodies. The limits are taken into consideration in the planning processes (i.e. execution of the adopted plans may not lead to limit overrun). In majority of cases the limits have a warning level defined above (or below) the limits. The acceptable level of liquidity risk is determined and updated at least once a year.
Regular stress tests are an additional and material element of the process. The Bank launched the stress tests programme, which ensures that stress tests are planned, developed, run and analysed in order to indicate the sources of potentially limited liquidity and to specify how such situations can be prevented, so that the current exposures remain near the set limits.
Main methods of liquidity risk measurement and replicating portfolios
ING Bank Śląski S.A. applies the following liquidity risk measures:
- NBP, EBA and DNB liquidity ratios,
- daytime liquidity norms,
- funding concentration per client and client segment,
- structural liquidity gap,
- Cash&Collateral gap for major currencies (PLN, EUR, USD, CHF).
A basic model as regards liquidity risk management is a model used for establishing a stable and volatile deposit base. We use the internal statistical model to that purpose.
Considering the balance sheet structure, and the Bank’s deposit base in particular, the Bank applies the advanced approach to modelling the risks related to demand deposits – the replicating portfolio concept. It consists in “replicating”, i.e. reproducing the actual period during which clients keep demand deposits at the Bank as well as the Bank’s pricing policy. This concept makes it possible to convert demand deposits into interest rate forwards. The reinvestment mode of the acquired funds is different for the “volatile” and “stable” part.
In H1 2014, the Bank streamlined the process of market risk (including liquidity risk) transfer and centralisation by implementing the Risk Transfer System (RTS) application. In particular, the change covered the full transfer of the (modelled) liquidity risk to the Treasury Department books.
Liquidity limits in 2014
In 2014, no cases of liquidity risk regulatory limits overrunning were found.