Liquidity Management: A Funding Risk Handbook

CHAPTER 5 Control Framework

This chapter looks at the processes banks should set forth in controlling funding liquidity risks and it summarizes the analysis so far. The Basel Committee issued some guidance principles on liquidity that are discussed in the first section. The second section looks into the specific control processes for liquidity that banks are expected to develop or have in place, taking into account lessons learnt from the recent crisis. The third section more specifically looks at monitoring and reporting, an increasingly relevant element for auditors and regulators. The fourth section presents options and indications for liquidity risk limit setting and the fifth the contingency liquidity plan process, this also being an important element of the control framework.

5.1 GOVERNANCE PRINCIPLES

The Basel Committee for Banking Supervision published a list of sound practice principles for banks' adequate liquidity management. These are a set of guidance rules for banks to apply in liquidity risk management and control, rather than being compulsory rules, the principles outline the behaviours and process shape one should have in assessing and managing liquidity risk. One can find many aspects and principles in common with other risk types and the same prudential approach is applied, aiming at greater managerial awareness and involvement in regular risk assessment.

There are many relevant elements and valid indications in these principles and it is worth going ...