(a) Responsibilities of the
board of directors.
(1) Liquidity risk tolerance. The
board of directors of a covered savings and loan holding company subject
to this subpart must:
(i) Approve the acceptable level of liquidity risk that the covered
savings and loan holding company may assume in connection with its
operating strategies (liquidity risk tolerance) at least annually,
taking into account the covered savings and loan holding company’s
capital structure, risk profile, complexity, activities, and size;
and
(ii) Receive and review at
least semiannually information provided by senior management to determine
whether the covered savings and loan holding company is operating
in accordance with its established liquidity risk tolerance.
(2) Liquidity
risk-management strategies, policies, and procedures. The board
of directors must approve and periodically review the liquidity risk-management
strategies, policies, and procedures established by senior management
pursuant to paragraph (c)(1) of this section.
(b) Responsibilities of the risk committee. The risk committee (or a designated subcommittee of such committee
composed of members of the board of directors) must approve the contingency
funding plan described in paragraph (f) of this section at least annually,
and must approve any material revisions to the plan prior to the implementation
of such revisions.
(c) Responsibilities
of senior management.
(1) Liquidity risk.
(i) Senior management of a covered
savings and loan holding company subject to this subpart must establish
and implement strategies, policies, and procedures designed to effectively
manage the risk that the covered savings and loan holding company’s
financial condition or safety and soundness would be adversely affected
by its inability or the market’s perception of its inability to meet
its cash and collateral obligations (liquidity risk). The board of
directors must approve the strategies, policies, and procedures pursuant
to paragraph (a)(2) of this section.
(ii) Senior management must oversee
the development and implementation of liquidity risk measurement and
reporting systems, including those required by this section and section
238.124.
(iii) Senior management
must determine at least quarterly whether the covered savings and
loan holding company is operating in accordance with such policies
and procedures and whether the covered savings and loan holding company
is in compliance with this section and section 238.124 (or more often,
if changes in market conditions or the liquidity position, risk profile,
or financial condition warrant), and establish procedures regarding
the preparation of such information.
(2) Liquidity
risk tolerance. Senior management must report to the board of
directors or the risk committee regarding the covered savings and
loan holding company’s liquidity risk profile and liquidity risk tolerance
at least quarterly (or more often, if changes in market conditions
or the liquidity position, risk profile, or financial condition of
the company warrant).
(3) Business lines or products.
(i) Senior management must approve
new products and business lines and evaluate the liquidity costs,
benefits, and risks of each new business line and each new product
that could have a significant effect on the company’s liquidity riskprofile.
The approval is required before the company implements the business
line or offers the product. In determining whether to approve the
new business line or product, senior management must consider whether
the liquidity risk of the new business line or product (under both
current and stressed conditions) is within the company’s established
liquidity risk tolerance.
(ii)
Senior management must review at least annually significant business
lines and products to determine whether any line or product creates
or has created any unanticipated liquidity risk, and to determine
whether the liquidity risk of each strategy or product is within the
company’s established liquidity risk tolerance.
(4) Cash-flow
projections. Senior management must review the cash-flow projections
produced under paragraph (e) of this section at least quarterly (or
more often, if changes in market conditions or the liquidity position,
risk profile, or financial condition of the covered savings and loan
holding company warrant) to ensure that the liquidity risk is within
the established liquidity risk tolerance.
(5) Liquidity
risk limits. Senior management must establish liquidity risk
limits as set forth in paragraph (g) of this section and review the
company’s compliance with those limits at least quarterly (or more
often, if changes in market conditions or the liquidity position,
risk profile, or financial condition of the company warrant).
(6) Liquidity
stress testing. Senior management must:
(i) Approve the liquidity stress testing
practices, methodologies, and assumptions required in section 238.124(a)
at least quarterly, and whenever the covered savings and loan holding
company materially revises its liquidity stress testing practices,
methodologies or assumptions;
(ii) Review the liquidity stress testing results produced under section
238.124(a) at least quarterly;
(iii) Review the independent review of the liquidity stress tests
under section 238.123(d) periodically; and
(iv) Approve the size and composition
of the liquidity buffer established under section 238.124(b) at least
quarterly.
(d) Independent review function.
(1) A covered savings and loan holding
company subject to this subpart must establish and maintain a review
function that is independent of management functions that execute
funding to evaluate its liquidity risk management.
(2) The independent review function must:
(i) Regularly, but
no less frequently than annually, review and evaluate the adequacy
and effectiveness of the company’s liquidity risk management processes,
including its liquidity stress test processes and assumptions;
(ii) Assess whether the company’s
liquidity risk-management function complies with applicable laws and
regulations, and sound business practices; and
(iii) Report material liquidity risk
management issues to the board of directors or the risk committee
in writing for corrective action, to the extent permitted by applicable
law.
(e) Cash-flow
projections.
(1)
A covered savings and loan holding company subject to this subpart
must produce comprehensive cash-flow projections that project cash
flows arising from assets, liabilities, and off-balance sheet exposures
over, at a minimum, short- and long-term time horizons. The covered
savings and loan holding company must update short-term cash-flow
projections daily and must update longer-term cash-flow projections
at least monthly.
(2) The covered
savings and loan holding company must establish a methodology for
making cash-flow projections that results in projections that:
(i) Include cash flows
arising from contractual maturities, intercompany transactions, new
business, funding renewals, customer options, and other potential
events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior
of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete
and cumulative cash flow mismatches over these time periods; and
(iv) Include sufficient detail
to reflect the capital structure, risk profile, complexity, currency
exposure, activities, and size of the covered savings and loan holding
company and include analyses by business line, currency, or legal
entity as appropriate.
(3) The covered savings and loan holding company must adequately
document its methodology for making cash flow projections and the
included assumptions and submit such documentation to the risk committee.
(f) Contingency funding plan.
(1) General. A covered savings and loan holding
company subject to this subpart must establish and maintain a contingency
funding plan that sets out the company’s strategies for addressing
liquidity needs during liquidity stress events. The contingency funding
plan must be commensurate with the company’s capital structure, risk
profile, complexity, activities, size, and established liquidity risk
tolerance. The company must update the contingency funding plan at
least annually, and when changes to market and idiosyncratic conditions
warrant.
(2) Components of the contingency funding plan.
(i) Quantitative
assessment. The contingency funding plan must:
(A) Identify liquidity stress events that
could have a significant impact on the covered savings and loan holding
company’s liquidity;
(B) Assess the
level and nature of the impact on the covered savings and loan holding
company’s liquidity that may occur during identified liquidity stress
events;
(C) Identify the circumstances
in which the covered savings and loan holding company would implement
its action plan described in paragraph (f)(2)(ii)(A) of this section,
which circumstances must include failure to meet any minimum liquidity
requirement imposed by the Board;
(D)
Assess available funding sources and needs during the identified liquidity
stress events;
(E) Identify alternative
funding sources that may be used during the identified liquidity stress
events; and
(F) Incorporate information
generated by the liquidity stress testing required under section 238.124(a).
(ii) Liquidity event management process. The
contingency funding plan must include an event management process
that sets out the covered savings and loan holding company’s procedures
for managing liquidity during identified liquidity stress events.
The liquidity event management process must:
(A) Include an action plan that clearly describes
the strategies the company will use to respond to liquidity shortfalls
for identified liquidity stress events, including the methods that
the company will use to access alternative funding sources;
(B) Identify a liquidity stress event management
team that would execute the action plan described in paragraph (f)(2)(ii)(A)
of this section;
(C) Specify the process,
responsibilities, and triggers for invoking the contingency funding
plan, describe the decision-making process during the identified liquidity
stress events, and describe the process for executing contingency
measures identified in the action plan; and
(D) Provide a mechanism that ensures effective
reporting and communication within the covered savings and loan holding
company and with outside parties, including the Board and other relevant
supervisors, counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan must include procedures
for monitoring emerging liquidity stress events. The procedures must
identify early warning indicators that are tailored to the company’s
capital structure, risk profile, complexity, activities, and size.
(iv) Testing. The covered savings and loan holding company must periodically test:
(A) The components of the
contingency funding plan to assess the plan’s reliability during liquidity
stress events;
(B) The operational
elements of the contingency funding plan, including operational simulations
to test communications, coordination, and decision-making by relevant
management; and
(C) The methods the
covered savings and loan holding company will use to access alternative
funding sources to determine whether these funding sources will be
readily available when needed.
(g) Liquidity risk limits.
(1) General. A covered savings and loan holding company subject
to this subpart must monitor sources of liquidity risk and establish
limits on liquidity risk that are consistent with the company’s established
liquidity risk tolerance and that reflect the company’s capital structure,
risk profile, complexity, activities, and size.
(2) Liquidity
risk limits established by a Category II savings and loan holding
company, or Category III savings and loan holding company. If
the covered savings and loan holding company is a Category II savings
and loan holding company or Category III savings and loan holding
company, liquidity risk limits established under paragraph (g)(1)
of this section by must include limits on:
(i) Concentrations in sources of funding
by instrument type, single counterparty, counterparty type, secured
and unsecured funding, and as applicable, other forms of liquidity
risk;
(ii) The amount of liabilities
that mature within various time horizons; and
(iii) Off-balance sheet exposures and
other exposures that could create funding needs during liquidity stress
events.
(h) Collateral, legal entity, and intraday liquidity risk monitoring. A covered savings and loan holding company subject to this subpart
must establish and maintain procedures for monitoring liquidity risk
as set forth in this paragraph.
(1) Collateral. The covered savings and loan holding company must establish and
maintain policies and procedures to monitor assets that have been,
or are available to be, pledged as collateral in connection with transactions
to which it or its affiliates are counterparties. These policies and
procedures must provide that the covered savings and loan holding
company:
(i) Calculates
all of its collateral positions according to the frequency specified
in paragraphs (h)(1)(i)(A) and (B) of this section or as directed
by the Board, specifying the value of pledged assets relative to the
amount of security required under the relevant contracts and the value
of unencumbered assets available to be pledged:
(A) If the covered savings and loan holding
company is not a Category IV savings and loan holding company, on
at least a weekly basis;
(B) If the
covered savings and loan holding company is a Category IV savings
and loan holding company, on at least a monthly basis;
(ii) Monitors the levels of unencumbered
assets available to be pledged by legal entity, jurisdiction, and
currency exposure;
(iii) Monitors
shifts in the covered savings and loan holding company’s funding patterns,
such as shifts between intraday, overnight, and term pledging of collateral;
and
(iv) Tracks operational and
timing requirements associated with accessing collateral at its physical
location (for example, the custodian or securities settlement system
that holds the collateral).
(2) Legal entities,
currencies and business lines. The covered savings and loan holding
company must establish and maintain procedures for monitoring and
controlling liquidity risk exposures and funding needs within and
across significant legal entities, currencies, and business lines,
taking into account legal and regulatory restrictions on the transfer
of liquidity between legal entities.
(3) Intraday exposures. The covered
savings and loan holding company must establish and maintain procedures
for monitoring intraday liquidity risk exposures that are consistent
with the covered savings and loan holding company’s capital structure,
risk profile, complexity, activities, and size. If the covered savings
and loan holding company is a Category II savings and loan holding
company or a Category III savings and loan holding company, these
procedures must address how the management of the covered savings
and loan holding company will:
(i) Monitor and measure expected daily
gross liquidity inflows and outflows;
(ii) Manage and transfer collateral
to obtain intraday credit;
(iii)
Identify and prioritize time-specific obligations so that the covered
savings and loan holding company can meet these obligations as expected
and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to
customers where necessary; and
(v) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the covered savings and
loan holding company’s overall liquidity needs.
