The Liquidity Risk Management Guide: From Policy to Pitfalls

8 Step III: Governance and High-Level Policy

The bank's appetite and tolerance for liquidity risk have now been defined. Ahead of the details of liquidity management it is necessary to agree on some high-level principles and policies on how to manage liquidity risk within the bank. This section can be viewed as the interpretation or further expansion of the risk appetite, taking something that is crafted out in a short form to be expanded into a wider detailed framework. Both the Institute of International Finance (IIF) and the BCBS have come up with good lists of major principles applied. They emphasize how critical a firm-wide risk governance is. This becomes evident when the largest risk management failures are being reviewed. Since 1994 we can find at least 10 separate risk management incidents, each causing losses in excess of $500m, where risk management failed. This is excluding the systemic meltdown in 2008. In all of these cases, ‘management failure’ is cited as one of major reasons for the losses and failures and in their summary of findings the Group of Senior Supervisors point out that ‘the failure of some boards of directors and senior managers to establish, measure, and adhere to a level of risk acceptable to the firm’ was one of the major weaknesses resulting in the 2008 liquidity crisis.¹ The regulators have done their bit in increasing the importance of governance. Under the UK regulatory regime the Board is made responsible for conducting an annual individual ...