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Liquidity Assessment Criteria
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Role of Liquidity
Liquidity refers to the capacity of a provincially regulated financial institution (“PRFI”) to generate or obtain sufficient cash or its equivalent to meet the PRFI’s commitments on time and at a reasonable price, and to fund new business opportunities as part of the PRFI’s operations.
Liquidity risk is the potential for losses to be incurred from holding insufficient liquidity to survive a contingent stress event, whether specific to the PRFI or market-wide in origin.
Adequacy of Liquidity
The following statements describe the rating categories used in assessing the adequacy of a PRFI’s liquidity and liquidity management policies and practices. Adequacy of liquidity includes both the flow of funds, as well as the level and quality of liquid assets. The assessment is made in the context of the nature, scope, complexity, and risk profile of a PRFI.
| Strong | Liquidity is strong for the nature, scope, complexity, and risk profile of the PRFI, and its liquidity ratio exceeds the internal targets and minimum regulatory requirements under most adverse business and economic conditions. The trend over the next 12 months is expected to remain positive. Liquidity management policies and practices are superior to generally accepted industry practices. |
| Acceptable | Liquidity is appropriate for the nature, scope, complexity, and risk profile of the PRFI, and its liquidity ratio meets the internal targets and minimum regulatory requirements under normal and some adverse business and economic conditions. The trend over the next 12 months is expected to remain positive. Liquidity management policies and practices meet generally accepted industry practices. |
| Needs Improvement | Liquidity is not always appropriate for the nature, scope, complexity, and risk profile of the PRFI and although meeting internal target and minimum regulatory requirements, the trend over the next 12 months is expected to remain uncertain. Liquidity management policies and practices may not meet generally accepted industry practices. |
| Weak | Liquidity is inappropriate for the nature, scope, complexity, and risk profile of the PRFI and does not meet, or marginally meets, minimum regulatory requirements. The trend over the next 12 months is expected to remain negative. Liquidity management policies and practices do not meet generally accepted industry practices. |
Liquidity Criteria
The following statements describe the criteria for assessing a PRFIs’ adequacy of liquidity and liquidity management policies and practices. The application and weighting of the individual criteria will depend on the nature, scope, complexity, and risk profile of a PRFI.
| Essential Elements | Criteria |
|---|---|
| 1. Adequacy of Liquidity | 1.1 Adequacy of the levels of liquidity in relation to the regulatory requirements, internal targets, and the PRFI’s financial condition and funding sources. 1.2 Appropriateness of the types and mix of liquid assets and the overall quality of liquid assets. 1.3 Appropriateness of the liquidity strategy, risk appetite, and tolerance. Extent to which the PRFI’s liquidity strategy, risk appetite, and tolerance reflect its financial and funding capacity. Extent to which the level of liquidity supports planned business activities. 1.4 Adequacy of the contingency funding and ability of the PRFI to raise additional liquidity in adverse business and economic conditions. |
| 2. Liquidity Management Policies and Practices | 2.1 Adequacy of the liquidity risk governance framework, policies, and practices. 2.2 Extent to which liquidity management policies and practices are enterprise-wide and supported by sufficient authority and resources. 2.3 Extent to which liquidity management policies and practices manage funding/structural liquidity risk by: • Setting liquidity risk tolerances; • Setting liquidity strategy; • Ensuring substantial diversification of funding sources; • Assessing the impact of future funding and liquidity shortfalls or excesses; • Setting approach to liquidity management in different currencies; • Ensuring adequate liquidity measures and ratios; • Ensuring an appropriate structural liquidity gap; and • Maintaining a funds transfer pricing methodology and process. 2.4 Extent to which liquidity management policies and practices manage contingency liquidity risk by: • Defining early warning and key risk indicators; • Performing stress testing, including sensitivity analysis and scenario testing; • Reviewing product behaviour and optionality assumptions; • Ensuring that an adequate and diversified portfolio of liquid assets and buffers are in place; and • Maintaining the contingency funding sources. 2.5 Appropriateness of the process for developing liquidity management policies and practices. 2.6 Extent to which the liquidity planning process is integrated with the PRFI’s strategic and business plans and provides for regular monitoring to ensure that it continues to meet regulatory minimum and target liquidity requirements. 2.7 Extent to which the liquidity management process provides for an appropriate level of stress testing under different scenarios, including possible events or changes in environment conditions that could adversely impact the PRFI. |
| 3. Senior Management and Board Oversight | 3.1 Extent to which senior management and board approval is required for: • Liquidity management mandate and resources; • Liquidity management policies and practices; and • Annual liquidity plan. 3.2 Adequacy of policies and practices to provide accurate and timely reports on the PRFI’s liquidity to enable senior management and the board (or a board committee) to assess compliance with: • The PRFI’s liquidity plan, including the results of scenario testing; and • Regulatory liquidity requirements. 3.3 Adequacy of policies and practices to perform regular independent reviews to ensure the liquidity management complies with approved policies and practices, and regulatory liquidity requirements and guidelines. |