Circular CBFA_2009_18 / Liquidity Risk Management

12-14 Rue du Congrès | 1000 Brussels
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Circular CBFA_2009_18 of May 8, 2009
Liquidity Risk Management

Scope:
Credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies.

Summary/Objectives:
In light of the recent turbulence observed in financial markets and in the context of international consultation among supervisory authorities, the CBFA has conducted an in-depth review of its prudential approach to the liquidity risk incurred by credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies. Based on this review, the CBFA intends to develop its prudential approach following the initiatives it has taken since 2005 in concert with the NBB to refine the supervision of liquidity management by these institutions. To this end, the CBFA is establishing observation ratios to monitor the liquidity position of Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies. Based on recently revised international standards, the CBFA is also updating its qualitative requirements concerning liquidity risk management. Finally, the CBFA has decided to intensify the monitoring of the liquidity position of Belgian credit institutions and financial companies, by increasing the frequency of reporting by these institutions regarding liquidity (reporting tables 90.31-32-33) from every three months to monthly, while reducing reporting deadlines.

Structure:

1. Introduction and context.
2. Establishment of observation ratios to monitor the liquidity risk of institutions.
3. Updating of qualitative requirements concerning liquidity management.
4. Intensification of reporting and reduction of reporting deadlines.

CBFA_2009_18 of May 8, 2009 2 / 4
CBFA 12-14 Rue du Congrès | 1000 Brussels
+32 2 220 53 42 | +32 2 220 54 93 | www.cbfa.be

Madam,
Sir,

1. Introduction and context
   In light of the recent turbulence observed in financial markets and given the international consultation conducted in this context by supervisory authorities, the CBFA has conducted an in-depth review of its prudential approach to the liquidity risk incurred by credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies. Based on this review, the CBFA intends to develop its prudential approach following the initiatives it has taken since 2005 in concert with the NBB to refine the supervision of liquidity management by these institutions.

2. Establishment of observation ratios to monitor the liquidity risk of institutions
   The CBFA is establishing observation ratios intended to monitor the liquidity position of Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies. In this regard, Annex CBFA_2009_18-1 of this circular provides a detailed description of the main prudential liquidity ratios currently used internally by CBFA services, under the term "stress test ratio." This stress test ratio aims to determine the extent to which the liquidity position of the concerned institutions is sufficiently robust to withstand the impact of exceptional circumstances, defined in a stress scenario (a combination of an institution-specific liquidity crisis and a general liquidity crisis). The stress test ratio used internally by the CBFA is calculated based on the liquidity information transmitted by the concerned institutions (tables 90.31 and 90.32). The manner in which this stress test ratio was developed aligns with the "best practices" recommended by supervisory authorities in neighboring countries. The CBFA aims to intensify the monitoring of the evolution of these liquidity ratios as observation ratios, for one-week and one-month positions on both a standalone and consolidated basis. The CBFA also intends, based on the level and evolution of these observation ratios, to strengthen the dialogue with institutions regarding their liquidity position. To this end, it will provide reporting institutions that wish to receive such information with feedback on the level and evolution of these ratios in their specific case. Since these observation ratios are applied on both a consolidated and standalone basis, the CBFA expects the concerned institutions to maintain an acceptable liquidity position at both the consolidated level and the standalone level (i.e., at the level of the Belgian credit institution taken separately) and territorial level (i.e., at the level of the Belgian branch in the case of foreign credit institutions). The CBFA also expects that cross-border liquidity transfers originating from Belgian credit institutions or Belgian branches of foreign credit institutions to foreign related parties fall within this framework. In any event, the CBFA retains the right to take prudential measures against a specific institution to improve its liquidity position or liquidity management, if necessary based on, inter alia, but not exclusively, the aforementioned stress test ratio.

At this stage, the CBFA does not wish to impose regulatory standards or quantitative liquidity limits and will take into account, if such standards or limits were to be introduced in the future, the international developments observed in this field as well as the potential impact of establishing such standards on the economic cycle. The establishment of the aforementioned observation ratios follows the policy pursued by the CBFA in this matter since the publication of Circular PPB-2006-17-CPB in 2006. The foregoing does not in any way imply that future liquidity standards will be based solely on these observation ratios.

3. Updating of qualitative requirements concerning liquidity management
   The CBFA is also updating its qualitative requirements concerning liquidity risk management, based on international standards in this area which have themselves been revised. Like other members of the Basel Committee and other supervisory authorities applying the international standards established by the latter, the CBFA has revised the qualitative requirements it had established in its Circular PPB-2006-17-CPB concerning the liquidity management of institutions. For this purpose, it relied on the international standards published in September 2008 by the Basel Committee in a document entitled "Principles for Sound Liquidity Risk Management and Supervision" 1. You will find this document in Annex CBFA_2009_18-2 of this circular. The CBFA will henceforth evaluate the qualitative adequacy of the internal organization of liquidity management by verifying compliance with these principles. The new Basel Committee standards constitute an update of the "Sound Practices for Managing Liquidity in Banking Organisations" which it published in February 2000 and whose principles the CBFA had applied until now.

The CBFA expects Belgian credit institutions, Belgian branches of foreign credit institutions, financial companies, liquidation bodies, and entities assimilated to liquidation bodies to begin implementing the aforementioned principles as of the date of publication of this circular. They will inform the CBFA by letter, by June 30, 2009, of the extent to which their current policies and procedures are compliant with these new principles, as well as of the schedule according to which they will proceed with any necessary adaptations to their liquidity management 2.

4. Intensification of reporting and reduction of reporting deadlines
   Finally, the CBFA will intensify the monitoring of the liquidity position of Belgian credit institutions and financial companies, by increasing the frequency of reporting by these institutions on liquidity (reporting tables 90.31-32-33) so that it is performed on a monthly basis, and by reducing reporting deadlines. Reporting will no longer be performed on a quarterly or semi-annual basis but on a monthly basis. Specifically, the CBFA expects Belgian credit institutions and financial companies to transmit the periodic reporting tables 90.31, 90.32 and, where applicable, 90.33 not every quarter or semester, but every month. The reporting covers the liquidity position as of the end of the month, after processing all transactions, and this on both a standalone and consolidated basis.

The reporting deadline is reduced to 15 banking business days from the reporting date for tables 90.31 and 90.32 on a standalone basis. The reporting deadline is reduced to 1 month and 7 calendar days from the reporting date for tables 90.31, 90.32 and 90.33 on a consolidated basis, to be transmitted by Belgian credit institutions that prepare consolidated accounts and by financial companies.

The new modalities regarding the frequency and deadline for transmitting reporting tables are applicable starting from the reporting covering the situation as of June 30, 2009 3.

Belgian branches of foreign credit institutions as well as liquidation bodies and entities assimilated to liquidation bodies continue to transmit tables 90.31, 90.32 and, where applicable, 90.33 on a quarterly basis. They are therefore not subject to the new modalities concerning the frequency of reporting. The new reporting deadlines are not applicable to them either.

You will find in Annex CBFA_2009_18-4 of this circular the CBFA Order of April 28, 2009, concerning the modifications made to the periodic reporting of credit institutions, which ratifies the new reporting modalities mentioned above.

1 "Principles for Sound Liquidity Risk Management and Supervision", Basel Committee on Banking Supervision, September 2008.
2 Specifically, this means that the reference made, in Chapter 2, Section 2, Paragraph 2.1, of the annex to Circular PPB-2006-17-CPB of December 20, 2006, to the document published by the Basel Committee in February 2000 must be replaced by a reference to the document entitled "Principles for Sound Liquidity Risk Management and Supervision", published in September 2008. Likewise, the enumeration of principles relating to sound liquidity risk management practices, appearing in Chapter 2, Section 2, Paragraph 2.4, of the annex to this same circular, must be replaced by the enumeration of updated qualitative requirements included in Annex CBFA_2009_18-3 of this circular. 3 The CBFA requests institutions that prepare consolidated accounts and who make use of the option offered by Circular PPB-2006-17-CPB to communicate internal liquidity ratios applied at the group level, to ensure, starting from the reporting covering the situation as of June 30, 2009, to also transmit the standard tables on a consolidated basis (tables 90.31, 90.32 and 90.33) every month, respecting the new reporting deadline (reduced to 1 month and 7 calendar days from the reporting date). The CBFA further requests these institutions to also communicate to it every month, starting from the reporting covering the situation as of June 30, 2009, the ratios they use internally, respecting the new reporting deadline provided for.

CBFA_2009_18 of May 8, 2009 4 / 4
CBFA 12-14 Rue du Congrès | 1000 Brussels
+32 2 220 53 42 | +32 2 220 54 93 | www.cbfa.be

To allow for better quality control, additional validation tests will also be established for liquidity reporting (tables 90.31-33) of all reporting institutions. These additional validation rules will be applied starting from the reporting covering the situation as of June 30, 2009. You will find an updated list of the validation rules applicable starting from the reporting covering the situation as of June 30, 2009 in the annexes of Circular PPB-2007-3-CPB dealing with solvency reporting under Basel II, which is available on the CBFA website.

The provisions of this circular modify certain points of the policy adopted by the CBFA in its Circular PPB-2006-17-CPB. They must therefore be read as a complement to that circular.
The CBFA intends to conduct a first evaluation of the measures taken and their impact during the last quarter of 2009, in light of economic developments and the evolution of international consultation conducted by supervisory authorities on the prudential approach to liquidity risk management by credit institutions. Depending on the result of this evaluation, the CBFA will examine whether coordination of provisions relating to liquidity management is necessary.
The aforementioned modifications do not, however, change the fact that the CBFA can and will continue to undertake individualized prudential actions, such as daily monitoring of liquidity positions or the application of quantitative liquidity limits or standards to certain institutions, as long as circumstances require.
A copy of this circular is transmitted to your commissioner or your approved auditor.
We ask you to accept, Madam, Sir, the expression of our distinguished consideration.
The President,
Jean-Paul SERVAIS.

Annexes: CBFA_2009_18-1 / Method of calculation of the CBFA "stress test" ratio.
CBFA_2009_18-2 / "Principles for Sound Liquidity Risk Management and Supervision", Basel Committee on Banking Supervision, September 2008.
CBFA_2009_18-3 / Updated enumeration of qualitative requirements applicable to liquidity management.
CBFA_2009_18-4 / Order concerning the modifications made to the periodic reporting of credit institutions.