Bank Negara Malaysia (“
BNM”) issued the
Policy Document on Liquidity Risk (“
Policy Document”) on 15 October 2024.
General
The Policy Document, which arises from an Exposure Draft issued in August 2023, will apply to:
a) a licensed bank under the Financial Services Act 2013 (“FSA”);
b) a licensed investment bank under the FSA;
c) a licensed Islamic bank under the Islamic Financial Services Act 2013 (“IFSA”);
d) a licensed international Islamic bank under the IFSA;
e) a prescribed institution under the Development Financial Institutions Act 2002; and
f) a financial holding company engaged predominantly in banking business.
With the exception of paragraph 18.5, the Policy Document will come into effect on
15 October 2025. When the Policy Document comes into effect, it will supersede the “
Dear CEO letter on Funds Transfer Pricing (FTP) Practices of Banking Institutions dated 6 November 2014.”
Paragraph 18.5 of the Policy Document which sets out the requirements to be complied with if a financial institution makes a public disclosure of its Liquidity Coverage Ratio (LCR) will come into effect on 1 January 2025.
The Policy Document sets out BNM’s requirements and guidance on the management of liquidity risk
1 to ensure that financial institutions are effective in assessing their exposures to liquidity risk and take appropriate measures to address their liquidity needs. The requirements have been developed based on the
Principles for Sound Liquidity Risk Management and Supervision2 and the
Guiding Principles on Liquidity Risk Management for Institutions Offering Islamic Financial Services3.
The Policy Document is to be read together with the policy documents and legal instruments set out in paragraph 6.1 of the Policy Document, including the policy documents on Liquidity Coverage Ratio
4 (LCR) and Net Stable Funding Ratio
5 (NSFR) which set out minimum regulatory liquidity requirements.
Summary of Main Requirements
The policy requirements and guidance are set out under the following 11 principles in Part B of the Policy Document:
Principle 1 - Roles and responsibilities of the board and senior management: The board and senior management must exercise effective oversight of the financial institution’s liquidity risk. This entails establishing a liquidity risk management framework that includes strategies, policies and controls to ensure that the financial institution maintains sufficient liquidity to address its liquidity obligations and withstand a range of stress events.
Principle 2 - Identification, measurement, monitoring and control of liquidity risk: A financial institution must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process must include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.
Principle 3 - Intraday liquidity management: A financial institution must actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, thus contributing to the smooth functioning of payment and settlement systems.
Principle 4 - Monitoring and control of liquidity risk across entities within the group and business lines: A financial institution must actively monitor and control liquidity risk exposures and funding needs within and across entities within the group and business lines, taking into account legal, regulatory, operational, Shariah and other limitations to the transferability of liquidity, including during periods of stress.
Principle 5 - Funding strategy: A financial institution must establish a sound funding strategy. The funding strategy must not only provide for effective diversification in the sources and tenor of funding, but also a plan for growing its on- and off-balance sheet activities in a sustainable manner. The financial institution must maintain both an ongoing presence in its chosen funding markets and strong relationships with fund providers. A financial institution must regularly gauge its ability to raise funds quickly from each funding source, and identify and monitor factors that may affect that ability.
Principle 6 - Liquidity costs, benefits and risks: A financial institution must incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval process for all its business activities (both on- and off-balance sheet), including contingent exposures, thereby aligning the risk-taking incentives of individual business lines with the liquidity risk exposures their activities create for the financial institution as a whole.
Principle 7 - Liquidity stress testing: A financial institution must conduct liquidity stress tests on a regular basis for a variety of short-term and protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that its current exposures remain within its established liquidity risk tolerance. The financial institution must use liquidity stress test outcomes to adjust its liquidity risk management strategies, policies and positions and to develop effective contingency plans.
Principle 8 - Liquid assets: A financial institution must maintain a cushion of unencumbered, liquid assets that can be converted easily or immediately into cash in a range of liquidity stress scenarios which may entail an institution-specific or market-wide shock or a combination of the two.
Principle 9 - Collateral management: A financial institution must actively manage its collateral positions, differentiating between encumbered and unencumbered assets. A financial institution must also monitor the legal entity and physical location where the collateral is held and how it may be mobilised in a timely manner.
Principle 10 - Contingency funding plan: A financial institution must have a formal contingency funding plan that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. The contingency funding plan must outline policies to manage a range of stress events, establish clear lines of responsibility, include clear invocation and escalation procedures and be regularly tested and updated to ensure that it is operationally robust.
Principle 11 - Public disclosure: A financial institution must publicly disclose high-quality liquidity-related information on a regular and timely basis to enable market participants and relevant stakeholders to make informed judgements about a financial institution’s ability to meet its liquidity needs. |
Detailed requirements and guidance relating to each of the above-mentioned principles are set out in the respective subsections of Part B of the Policy Document.
Article by Sharifah Shafika Alsagoff (Partner) and Hafidah Aman Hashim (Partner) of the Islamic Finance Practice and Lee Ai Hsian (Partner) of the Banking and Finance Practice of Skrine.
1 The expression “liquidity” refers to the ability of a financial institution to fund assets and meet obligations as they come due. Effective liquidity risk management helps to ensure that a financial institution is able to meet its cash flow obligations at all times.
2 Issued by the Basel Committee for Banking Supervision (BCBS) in September 2008.
3 Issued by the Islamic Financial Services Board (IFSB) in March 2012.
4 Issued by BNM on 25 August 2016.
5 Issued by BNM on 31 July 2019.