Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan drawdowns, guarantees and from margin and other calls on cash-settled derivative instruments. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty.
To manage liquidity risk, the Bank uses a three-tier model:
- strategic management at business planning that sets target volumes and structure of assets and liabilities;
- tactical management by setting requirements and limits, as applicable to various units within ALCO;
- day-to-day management to match incoming and outgoing cash flows, as carried on by Treasury on a daily basis.
ALCO is responsible for organisation of control of compliance with liquidity targets and strategies for their achievement. With the level of balance sheet liquidity being driven, in the first place, by loans, and, in the second place, by the funding base, being more volatile, ALCO sets caps on loans as a share of total assets in proportion to capital.
As part of liquidity risk management, the Bank maintains a portfolio of liquid assets. Approach to managing liquidity taken by management is to ensure, to the extent possible, continuous adequate liquidity to settle liabilities as they fall due, both under normal and financial downturn conditions without incurring unreasonable loss or reputational risks.