As mentioned above, liquidity measurement and management are mainly governed by the NLF and SRR requirements. These guidelines propose at minimum how liquidity risk is to be measured and managed.
Under the NLF, banks are required to submit prescribed information on a monthly basis. Liquidity risk is measured vide the use of cash-flow maturity mismatch where assets and liabilities, both ON and OFF balance sheets, are projected from 1 week up to above 1 year from the current position. These maturities are divided into 6 buckets: namely, up to 1 week (for InvB, up to 3 days), 1 week to 1 month (for InvB, 3 days to 1 month), 1 to 3 months, 3 to 6 months, 6 to 12 months, and above 1 year. In the NLF, banking institutions are required to allocate their asset and liabilities based on their contractual and behavioural maturities. Both are reported in NLF submissions. Contractual maturity is based on the actual maturity agreed in the contract, i.e. a 1-month Fixed Deposits (FD) would be slotted either in the 1 week to 1 month bucket, if the remaining maturity of the deposit is 1 month, while behavioural maturity is the maturity based on the behaviour of the assets or liabilities. An example of behavioural assumption is, if the 1-month FD mentioned under contractual maturities is rolled over for a period up to 6 months, the amount of the FD may be slotted in the 3 to 6 months bucket. In terms of behavioural maturity methodology, the NLF prescribes a set of benchmark treatments. If banks chose to differ from these benchmark treatments, banks have to satisfy BNM on the robustness of their methods in producing the behavioural maturity.
Banks are required to manage and ensure that the short-term liquidity obligations, i.e. up to 1 week and 1 week to 1 month maturity buckets, are adequately satisfied under normal course of business (level 1) as well as under withdrawal shock scenarios (level 2). How this work is,
under the normal course of business, the on- and off-balance-sheet assets maturing in the two shortest maturity buckets are compared with on- and off-balance-sheet liabilities of the same maturity tenures. The shortfall or surplus from these two maturity buckets is then added with withdrawal shocks of 3% and 5% of total deposits respectively. The new shortfall or surplus is then compared with the liquefiable assets and available credit lines to see the overall result. If the bank faces a shortfall, they have to rectify the situation soonest possible to ensure the overall results are always surplus to comply with the framework.
To ensure that the determination of liquefiable assets is on a more consistent and objective manner, a set of “qualifying characteristics” for the recognition of liquefiable assets has been identified under the NLF. The qualifying characteristics for liquefiable assets are as follows:
Assets easily convertible in large sums into cash at short i.
notice;
Low counter-party credit risks; ii.
Free from any encumbrances that restricts its sale or repo iii.
capability; and
Have sufficiently deep secondary market or repo market iv.
which continue to exist during tight liquidity situations, or which the Central Bank of Malaysia is prepared to purchase, lend or allowed for repo in the course of its money market or liquidity support operation
In order to factor in market movements in the framework, liquefiable assets used to meet the shortfall after withdrawal shocks are valued using yield slippages. The more risky the assets the higher the yield slippage, i.e. government-issued bonds are given 2% yield slippage, while PDS are given 10%.
Apart from monitoring the overall mismatches in the 1st and 2nd maturity buckets, the framework also requires banks to calculate and monitor a series of broad ratios which indicate the bank’s dependency on a certain funding source. The ratios cover dependency on large customer deposits, interbank markets and offshore market. Any banks found to be over-reliant on a certain funding source would be asked to submit plans to diversify their funding source.
In terms of SRR, banks are required to maintain 1% of eligible liabilities (EL), as at June 2009. The SRR has two levels both of which are required to be complied by banks. The first level deals with how banks are to calculate the balances in their Statutory Reserve Account. Banks are required to observe the average daily amount of EL over two fortnightly periods. EL Period A is average daily EL between 1st and 15th (inclusive) while period B is average daily EL between 16th and last day of the month (inclusive). In coming up with EL of each period, banks are prohibited from offsetting negative daily EL with positive ones. All negative daily EL should be zerorised. Banks have to maintain average reserve balance for 1st and 15th day of any month equivalent to 1% of EL Period A of the preceding month while the rest of the days in the month would be 1% of EL Period B of the preceding month. Under the second level, banks are required to maintain in the balances in the Statutory Reserve Account within 20% daily variation band around the prevailing policy rate. What this means is, as current prevailing rate is 1%, Malaysian banks have to maintain daily balances in the band of between 0.8% and 1.2%. Balances below the band are not permitted while balances in excess of the band’s ceiling will not be recognised in meeting the average fortnightly requirement as EL.
As of 1st September 2007, the EL base consists of ringgit- denominated deposits and non-deposits liabilities, net of interbank assets and placements with BNM. However, a revised guideline issued in March 2009, have allowed banks to make additional adjustments to their EL base. Banks are also allowed to deduct ringgit marketable securities held in their trading book provided banks’ Trading Book Policy Statement (TBPS) have been approved by BNM. Principal Dealers meanwhile are allowed to deduct specified securities in their trading and banking books as well as ringgit marketable securities which are not specified in their trading book.