US regulatory authorities yesterday released proposed guidance on contingent funding and liquidity risk in a bid to bring US financial institutions into alignment with international liquidity standards.
In a consultation paper released jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, the US agencies re-emphasised "the importance of cashflow projections, diversified funding sources and a well-developed contingency funding plan" as primary tools for measuring and managing liquidity risk.
Formally titled Interagency guidance on funding and liquidity management, the consultation brings US principles into line with the Basel Committee on Banking Supervision's recently released Principles for sound liquidity risk management and supervision.
Although the new document mainly covers old ground, it also provides more detail on some proposals - the active management of intraday liquidity and collateral, the maintenance of adequate levels of highly liquid marketable securities free of legal or regulatory impairments that can be used to meet liquidity needs in stressful situations, and the establishment of comprehensive contingency funding plans.
Supervisors will then "assess these critical elements in their reviews of an institution's liquidity risk management process in relation to its size, complexity and scope of operations".
Institutions will also be required to stress test regularly for a variety of firm-specific and market-wide events across multiple time horizons to identify sources of liquidity strain, and should be able to calculate all of their collateral positions on an intraday and overnight basis.
While many of the statutes are similar to existing US liquidity risk mandates, the guidance seeks to better marry current funding measures with those thrashed out by the Basel Committee in response to the lessons of the financial crisis.
When finalised, the guidance will apply to all US domestic financial institutions, including banks, thrifts and credit unions. Comments must be submitted to firms' respective regulators within 60 days.
More on Regulation
National conflicts in margin rules can only be fixed via mutual recognition
OpRisk Asia: Revised standardised approach an improvement but no panacea
OpRisk Asia: New market structures have led to op risk primacy
Strict classification of structured products into 'complex' and 'non-complex' criticised
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.