Ilaap Guidelines1

IMPLEMENTATION OF BASEL II/III
INTERNAL LIQUIDITY ADEQUACY

ASSESSMENT PROCESS (ILAAP) GUIDELINES
Directorate of Financial Sector Supervision
2/9/2024 1
Contents
 Preliminary provisions
 Citation, Authorization, Application, Definitions, Introduction
Objective, Features of ILAAP.
 The ILAAP Framework
 Board and senior management oversight, Liquidity and funding risk
management framework, Intra-day management of liquidity,
Managing the HQLA buffer, Management of collateral, Managing
liquidity across legal entities, Funding diversification and market
access, Management of asset encumbrance, Pricing, Stress testing,
Liquidity contingency plan, Internal control and review.
 General provisions
 Reporting to the Bank
 Supervisory Review and Evaluation Process
2/9/2024 2
Preliminary provisions
 Citation: ILAAP Guidelines, 2023

 Authorization: Issued under Section 71 of the BFIA,
2006.
 Application: To all banks and financial institutions on
solo and consolidated basis.
 Definitions: Interpretation of terms used in the
guidelines.
2/9/2024 3
Preliminary provisions
 Objective:
 The key objective of the ILAAP is to ensure that banks and financial
institutions not only maintain adequate liquidity to meet prescribed
minimum regulatory requirements, but also keep sufficient liquidity to
meet its current and future business plans and related risks
 Features of ILAAP:
a) Board and senior management oversight;
b) Sound liquidity assessment;
c) Comprehensive risk assessment;
d) Monitoring and reporting;
e) Internal control and review; and
f) Stress testing.
2/9/2024 4
The ILAAP Framework
 Board and senior management oversight:

 ILAAP is the responsibility of Board of Directors.
 The ILAAP document must be approved by the Board of
Directors
 It must be consistent with the bank or financial institution’s
approach for measuring and managing liquidity and
funding risks.
 The Board of Directors to ensure that the ILAAP is well
integrated into business & strategic plans, management
processes and the bank or financial institution’s decision-
making culture.
2/9/2024 5
The ILAAP Framework
 Liquidity and funding risk management framework:

 A bank or financial institution shall have in place robust strategies,
policies, processes and systems that enable it to identify, measure,
manage and monitor liquidity risk and funding risk over an
appropriate set of time horizons
 The strategies, policies, processes and systems must be
proportionate to the complexity, risk profile and scope of
operation of the bank or financial institution
 A bank or financial institution shall put in place risk management
policies to define its approach to asset encumbrance and collateral
management.
2/9/2024 6
The ILAAP Framework
 Intra-day management of liquidity:

 A bank or financial institution shall actively manage its intra-day liquidity
positions and any related risks so that it is able to meet its payment and
settlement obligations on a timely basis
 Intra-day liquidity management arrangements should enable it to:
 meet its payment and settlement obligations on a timely basis
 identify and prioritize the most time-critical payment and settlement
obligations
 measure expected daily gross liquidity inflows and outflows, anticipate
the intra-day timing of these flows
 manage the timing of its liquidity outflows such that priority is given to
the bank’s most time-critical payment obligations.
2/9/2024 7
The ILAAP Framework
 Managing the HQLA buffer:

 Banks and financial institutions shall:
 assess their ability to convert their buffers of liquid assets
into cash in a short timeframe.
 set a risk appetite framework which will govern the
management and monitoring of their liquid asset portfolio
 have appropriate internal limits and controls to ensure
that the ability to monetize their stock of HQLAs in stress is
not limited in any way.
2/9/2024 8
The ILAAP Framework
 Management of collateral:
 Banks and financial institutions shall actively manage collateral
positions and distinguish between pledged and unencumbered
assets that are available at all times, in particular during
emergency situations.
 Banks and financial institutions shall take into account the legal
entity in which assets reside, the country where assets are legally
recorded as well as their eligibility and must monitor how assets
can be mobilized in a timely manner.
2/9/2024 9
The ILAAP Framework
 Managing liquidity across legal entities:

 In managing liquidity risk exposures and related
funding needs, banks and financial institutions shall
take into account:
 existing legal, regulatory and operational limitations to
potential transfers of liquidity and unencumbered assets
amongst entities
 any other constraints on the transferability of liquidity
and unencumbered assets across business lines, countries
and currencies.
2/9/2024 10
The ILAAP Framework
 Funding diversification and market access:

 A bank or financial institution shall ensure that it has access to
funding which is adequately diversified, both as to source and tenor.
 Management of asset encumbrance:
 Board of Directors to receive timely information on:
 the current and expected level and types of asset encumbrance and
related sources of encumbrance
 the amount, expected level and credit quality of unencumbered assets
that are capable of being encumbered
 the expected amount, level and types of additional encumbrance that
may result from stress scenarios
2/9/2024 11
The ILAAP Framework
 Pricing:
 Banks and financial institutions shall ensure that liquidity and
funding costs, benefits and risks are fully incorporated into
product pricing, performance measurement and incentives,
and new product and transaction approval processes.
 All significant business lines shall be included, whether on or off-
balance sheet.
 Both stressed and business-as-usual costs shall be assessed.
 The process shall be transparent and understood by business
line management, and regularly reviewed to ensure it remains
appropriately calibrated.
2/9/2024 12
The ILAAP Framework
 Stress testing:
 Comprehensive, robust stress testing is vital to ensure
compliance with the overall liquidity adequacy.
 Banks and financial institution shall consider in their stress
testing the impact of a range of severe but plausible stress
scenarios on their cash flows, liquidity resources, profitability,
solvency, asset encumbrance and survival horizon.
 Board of Directors to regularly review the stress tests and
scenarios to ensure that their nature and severity remain
appropriate and relevant to the bank.
2/9/2024 13
The ILAAP Framework
 Stress testing:
 Banks and financial institutions to have a policy framework on
liquidity stress testing, including items such as the number of
scenario’s used, scope, reporting frequency, risk drivers and
appropriate time horizons
 The extent and frequency of stress testing shall be
commensurate with the size and complexity of the bank or
financial institution .
 Banks and financial institutions shall make appropriate
assumptions, both quantitative and qualitative
 Uses of the results of liquidity stress testing
2/9/2024 14
The ILAAP Framework
 Liquidity contingency plan:

 Banks and financial institutions to develop an effective liquidity
contingency plan, taking into account the outcome of different stress test
scenarios.
 The liquidity contingency plan shall also set out adequate strategies and
proper implementation measures in order to address possible liquidity
shortfalls
 The plan shall be regularly evaluated and tested to ensure its
effectiveness and operational feasibility
 Banks and financial institutions shall take the necessary operational steps
in advance to ensure that liquidity contingency plans can be
implemented immediately, including holding collateral available for the
Bank’s funding.
2/9/2024 15
The ILAAP Framework
 Internal control and review:

 Effective control of the liquidity assessment process shall include an
independent review by internal auditor, where appropriate
external auditor.
 Internal as well as external auditors shall frequently monitor and
test risk management processes.
 The aim is to ensure that the information on which decisions are
based is accurate so that processes fully reflect management
policies and that regular reporting, including the reporting of limit
breaches and other exception based reporting, is undertaken
effectively.
2/9/2024 16
General provisions
 Reporting to the Bank:

 Banks and financial institutions shall, not later than end of
April, submit to the Bank a Board approved ILAAP
report as at 31st December of previous year.
 The ILAAP document shall contain an assessment of the
bank or financial institution’s liquidity and funding profile
as at the end of previous year and projections for the next
one year.
2/9/2024 17
Minimum contents of an ILAAP report
 Overview, summary conclusions;

 LCR Reporting;
 Liquidity Risk Assessment;
-Evaluation of intraday risk;
-Evaluation of Liquidity buffer and counterbalancing
capacity.
 Inherent funding risk assessment
 Risk management assessment
2/9/2024 18
General provisions
 Supervisory Review and Evaluation Process:

 The Bank shall assess whether a bank or financial institution, in its ILAAP
document, has adequately identified its liquidity needs across appropriate
time horizons in severe but plausible stresses for all relevant risk drivers
and whether its liquidity resources are adequate to meet those needs.
 In addition, the Bank shall review the governance arrangements of the
bank or financial institution, its risk management culture, and the ability
of the Board of Directors and senior management to perform their duties.
 The Bank shall determine whether the arrangements, strategies, processes
and mechanisms implemented by a bank or financial institution and the
liquidity it holds provide sound management and adequate coverage of
its risks.
2/9/2024 19
ILAAP GUIDELINES
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2/9/2024 20

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IMPLEMENTATION OF BASEL II/III

INTERNAL LIQUIDITY ADEQUACY

Directorate of Financial Sector Supervision

 Citation: ILAAP Guidelines, 2023

 Board and senior management oversight:

 Liquidity and funding risk management framework:

 Intra-day management of liquidity:

 Managing the HQLA buffer:

 Managing liquidity across legal entities:

 Funding diversification and market access:

 Liquidity contingency plan:

 Internal control and review:

 Reporting to the Bank:

 Overview, summary conclusions;

 Supervisory Review and Evaluation Process:

Thank You For Listening

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