(a) Responsibilities
of the board of directors.
(1) Liquidity
risk tolerance. The board of directors of a bank holding company
that is subject to this subpart must:
(i) Approve the acceptable level of
liquidity risk that the bank holding company may assume in connection
with its operating strategies (liquidity risk tolerance) at least
annually, taking into account the bank 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 bank
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 bank holding
company subject to this subpart must establish and implement strategies,
policies, and procedures designed to effectively manage the risk that
the bank 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
252.35.
(iii) Senior management
must determine at least quarterly whether the bank holding company
is operating in accordance with such policies and procedures and whether
the bank holding company is in compliance with this section and section
252.35 (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 bank 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 risk profile.
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 bank 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 252.35(a) at least quarterly, and whenever the
bank holding company materially revises its liquidity stress testing
practices, methodologies or assumptions;
(ii) Review the liquidity stress testing
results produced under section 252.35(a) at least quarterly;
(iii) Review the independent review
of the liquidity stress tests under section 252.34(d) periodically;
and
(iv) Approve the size and
composition of the liquidity buffer established under section 252.35(b)
at least quarterly.
(d) Independent review function.
(1) A bank 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 bank 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 bank holding company must update short-term cash-flow projections
daily and must update longer-term cash-flow projections at least monthly.
(2) The bank 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 bank holding
company and include analyses by business line, currency, or legal
entity as appropriate.
(3) The bank 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 bank 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 bank holding company’s liquidity;
(B) Assess the level and nature of the
impact on the bank holding company’s liquidity that may occur during
identified liquidity stress events;
(C) Identify the circumstances in which the bank 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 252.35(a).
(ii) Liquidity event management process. The
contingency funding plan must include an event management process
that sets out the bank 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 bank 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 bank 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 bank 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 bank holding company 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 global
systemically important BHC, Category II bank holding company, or Category
III bank holding company. If the bank holding company is a global
systemically important BHC, Category II bank holding company, or Category
III bank holding company, liquidity risk limits established under
paragraph (g)(1) of this section 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 bank holding company subject to this subpart must establish and
maintain procedures for monitoring liquidity risk as set forth in
this paragraph.
(1) Collateral. The bank 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 bank holding company:
(i) Calculates all
of its collateral positions according to the frequency specified in
paragraph (h)(1)(i)(A) or (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 bank holding company is not a Category
IV bank holding company, on at least a weekly basis; or
(B) If the bank holding company is a Category
IV bank 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 bank 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 bank 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 bank holding company
must establish and maintain procedures for monitoring intraday liquidity
risk exposures that are consistent with the bank holding company’s
capital structure, risk profile, complexity, activities, and size.
If the bank holding company is a global systemically important BHC,
Category II bank holding company, or a Category III bank holding company,
these procedures must address how the management of the bank 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 bank
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 bank holding company’s
overall liquidity needs.
