Chapter Four: Liquidity Risk Management

Section One: Development of Liquidity Management Monitoring in Banks

In light of the importance of liquidity management as a key component of bank safety and soundness, and to ensure the stability of the banking sector, the National Bank of Ethiopia has issued the following directives:

1. Banks shall ensure that their liquidity management policy is consistent with their overall business strategy and risk appetite, and is approved by the Board of Directors.

2. Banks shall maintain a minimum liquidity ratio of 20% of total liabilities, calculated as the sum of liquid assets divided by total liabilities, in accordance with the guidelines issued by the National Bank of Ethiopia.

3. Banks shall ensure that their liquidity management policy is reviewed and updated regularly.

4. Banks shall establish a liquidity management department responsible for monitoring and managing liquidity risk. This department shall:

   • Ensure that the liquidity management policy is implemented effectively.
   • Monitor daily liquidity positions and report to senior management.
   • Conduct stress tests and scenario analysis.
   • Prepare liquidity reports for the Board of Directors and senior management.

5. The National Bank of Ethiopia shall conduct periodic reviews of banks' liquidity management practices.

The National Bank of Ethiopia has issued the following guidelines:

1. Banks shall submit their liquidity management policy to the National Bank of Ethiopia for approval within 30 days of the issuance of this directive.

2. Banks shall submit quarterly liquidity reports to the National Bank of Ethiopia.

3. Banks shall conduct stress tests at least annually.

The National Bank of Ethiopia has issued the following guidelines:

1. Banks shall submit their liquidity management policy to the National Bank of Ethiopia for approval within 30 days of the issuance of this directive.

2. Banks shall submit quarterly liquidity reports to the National Bank of Ethiopia.

3. Banks shall conduct stress tests at least annually.

The National Bank of Ethiopia has issued the following guidelines:

1. Banks shall submit their liquidity management policy to the National Bank of Ethiopia for approval within 30 days of the issuance of this directive.

2. Banks shall submit quarterly liquidity reports to the National Bank of Ethiopia.

3. Banks shall conduct stress tests at least annually.

Guideline Paper for the Development of Liquidity Management Monitoring in Banks

This guideline paper is issued by the National Bank of Ethiopia to provide guidance to banks on the development of liquidity management monitoring. The guideline paper is based on the international best practices and the National Bank of Ethiopia's experience in supervising banks' liquidity management.

The guideline paper is intended to help banks to:

• Develop a comprehensive liquidity management policy.
• Establish a liquidity management department.
• Implement daily liquidity monitoring.
• Conduct stress tests and scenario analysis.
• Prepare liquidity reports for the Board of Directors and senior management.

First: Necessity of Establishing a Liquidity Management Department

Banks shall establish a liquidity management department responsible for monitoring and managing liquidity risk. The department shall be independent from the business units and shall report directly to the senior management.

The liquidity management department shall have the following responsibilities:

• Develop and implement the liquidity management policy.
• Monitor daily liquidity positions and report to senior management.
• Conduct stress tests and scenario analysis.
• Prepare liquidity reports for the Board of Directors and senior management.
• Ensure compliance with the National Bank of Ethiopia's liquidity regulations.

Second: Daily Monitoring and Management of Liquidity

Banks shall monitor their daily liquidity positions and report to senior management. The daily liquidity monitoring shall include:

• Monitoring of cash flows.
• Monitoring of funding sources.
• Monitoring of liquidity ratios.
• Monitoring of contingent liabilities.

Third: Maturity Ladder

Banks shall establish a maturity ladder to monitor the maturity profile of their assets and liabilities. The maturity ladder shall include:

• Assets and liabilities by maturity buckets.
• Cumulative net cash flows by maturity buckets.
• Cumulative liquidity gap by maturity buckets.

The maturity buckets shall be:

• Overnight.
• 1-7 days.
• 8-30 days.
• 31-90 days.
• 91-180 days.
• 181-365 days.
• Over 1 year.

Banks shall review the maturity ladder regularly and update it as necessary.

Fourth: Stress Testing

Banks shall conduct stress tests to assess their resilience to liquidity shocks. The stress tests shall include:

• Historical scenarios.
• Hypothetical scenarios.
• Reverse stress tests.

The stress tests shall be conducted at least annually and shall be reviewed by the Board of Directors.

Fifth: Liquidity Contingency Plan

Banks shall develop a liquidity contingency plan to address potential liquidity crises. The contingency plan shall include:

• Early warning indicators.
• Trigger points for activating the contingency plan.
• Actions to be taken in the event of a liquidity crisis.
• Communication plan.

The contingency plan shall be reviewed and updated regularly.

Sixth: Reporting

Banks shall submit regular liquidity reports to the National Bank of Ethiopia. The reports shall include:

• Liquidity ratios.
• Maturity ladder.
• Stress test results.
• Contingency plan status.

The reports shall be submitted quarterly.

Seventh: Supervision

The National Bank of Ethiopia shall supervise banks' liquidity management practices. The supervision shall include:

• Review of liquidity management policy.
• Review of liquidity reports.
• On-site inspections.
• Meetings with senior management.

The National Bank of Ethiopia shall take supervisory actions if banks fail to comply with the liquidity regulations.

Eighth: Effective Date

This guideline paper shall enter into force on the date of its issuance.

The National Bank of Ethiopia Directorate of Banking Supervision Addis Ababa, Ethiopia Date: 16/02/2008 E.C.