Liquidity Risk Management - Sound LRM framework

HONG KONG MONETARY AUTHORITY 香港金融管理局 Banking Supervision Department Our Ref.: Bl/15C 7 Janua塄 2026 The Chief Executive All Authorized Institutions Dear Sir / Madam, Liquidity Risk Management I am writing to share good industry practices on liquidity risk management based on observations from recent superviso駕 reviews of authorized institutions (AIs) by the Hong Kong Monetary Authority (HKMA). In the light of lessons learned from the 2023 Banking Turmoil in the US and Europe, the HKMA has provided guidance to assist AIs in enhancing interest rate risk and liquidity risk management amid the evolving operating environment for banks'. Meanwhile, the HKMA has conducted a range of reviews of AIs' liquidity risk management focusing on stress-testing, contingency planning and monitoring tools. Good practices identified from these reviews are highlighted below (i) Liquidity stress-testing Growing digitalisation of banking services and popularity of social media may exacerbate the speed and scale of deposit outflows in times of stress. As pre￾emptive measures, many AIs have already reviewed and enhanced their liquidity stress-testing framework by recalibrating the pace of deposit outflows to factor in characteristics of their deposit bases and the potential amplification of stress through digital channels. Several AIs have also 魚lly deployed reverse stress tests to identi匆 the levels of stress which might potentially threaten their resilience, and develoned measures to address the identified vulnerabilities. /...Page2 lIncluding HKMA circulars on "Lessons drawn on the Banking Turmoil in the US and Europe" of 15 December 2023, and "Interest rate risk management" of 12 Februa鑼 2025. 55th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong Tel: (852) 2878 1946 Fax: (852) 2878 1670 E-mail: clkchu@hkma.gov.hk Website: www.hkma.gov.hk 香港中環金融街8 號國際金融中心2 期55 樓 電jl: (852) 2878 1946 傳真 : (852) 2878 1670 電郵: clkchu@hkma.gov.hk 網址：www.hkma.gov.hk

(ii) Contingency planning Putting in place robust and operationally feasible contingency 鈿nding plans (CFPs) would help AIs to respond swiftly to liquidity shocks. In addition to conducting regular and comprehensive drills, AIs have maintained a sufficient liquidity cushion for handling contingencies outside business hours, strengthened their 魚nding arrangements with Head Offices or parent banks, and enhanced the capability to generate timely liquidity information in times of stress. The internal audit function of some AIs also evaluates periodically the adequacy of their CFPs and readiness of the AIs to execute the plans. (iii) Monitoring tools Effective tools and adequate capacity for identi鸟ing and managing emerging liquidity risk are important. As noted in the reviews, some AIs have adopted metrics beyond those specified in the superviso塄 guidance and banking returns to support internal surveillance. Several AIs have leveraged advanced technology tools to detect any emerging sentiment in social media Details of the good industry practices as well as related superviso鑼 expectations are provided in the Annex. AIs should review and enhance their risk management systems and controls as appropriate, having regard to these expectations and practices. Should your institution have any questions about this circular, please feel free to contact us at bsliquidityrisk@hkma.gov.hk. Yours 魚ith鈿lly, Carmen Chu Executive Director (Banking Supervision) Endl.