Prudential Financial Policy Department
The broad concept
The main thrust of the Framework’s approach to liquidity management is the projection up to 1 year of the maturity profile of a banking institution’s assets, liabilities and off-balance sheet commitments from a given position. The focus is on the ability of a banking institution to match its short-term liquidity requirement arising from maturing obligations with maturing assets, followed by a medium-term assessment of liquidity up to 1 year. The analysis will also be supported by some indicative ratios on the banking institution’s funding structure, which serves to monitor whether or not a banking institution is becoming over reliant on a particular funding source.
Liquidity is assessed from three levels:
The first level assesses the sufficiency of a banking institution’s liquidity in the normal course of its business over the next few months.
The second level assesses whether or not a banking institution has the capacity to withstand liquidity withdrawal shocks.
The third level assesses a banking institution’s general funding structure, in particular, to assess the degree of dependency on certain known volatile markets.
First level liquidity measurement
The liquidity measurement framework begins with a maturity ladder profile of five maturity bands beginning from “up to 1 week” (“up to 3 days” for investment banks) to a “6 to 12 month” band. Banking institutions’ assets, liabilities and off-balance sheet commitments