Prudential Regulation Authority Rulebook

11.1

A firm must consider different liquidity risk mitigation tools, including a system of limits and liquidity buffers in order to be able to withstand a range of different stress events and an adequately diversified funding structure and access to funding sources. It must review those arrangements regularly.

[Note: Art. 86(7) of the CRD]

11.2

A firm must consider alternative scenarios on liquidity positions and on risk mitigants and must review the assumptions underlying decisions concerning the funding position at least annually. For these purposes, alternative scenarios must address, in particular, off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities or other special purpose entities, as referred to in the CRR in relation to which the firm acts as sponsor or provides material liquidity support.

[Note: Art. 86(8) of the CRD]

11.3

A firm must:

1. (1) conduct on a regular basis appropriate stress tests so as to:
1. (a) identify sources of potential liquidity strain;
2. (b) ensure that current liquidity exposures continue to conform to the liquidity risk and funding risk appetite established by that firm's management body; and
3. (c) identify the effects on that firm's assumptions about pricing; and
2. (2) analyse on a regular basis the separate and combined impact of possible future liquidity stresses on its:
1. (a) cash flows;
2. (b) liquidity position;
3. (c) profitability; and
4. (d) solvency.

11.4

A firm must consider the potential impact of institution-specific, market-wide and combined alternative scenarios. Different time periods and varying degrees of stressed conditions must be considered.

[Note: Art. 86(9) of the CRD]

11.5

In carrying out the liquidity stress tests required by 11.3, a firm must make appropriate assumptions around the major sources of risk, including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:

1. (1) retail funding risk;
2. (2) wholesale secured and unsecured funding risk;
3. (3) risks arising from the correlation between funding markets and lack of diversification between funding types;
4. (4) off-balance sheet funding risk;
5. (5) risks arising from the firm’s funding tenors;
6. (6) risks associated with a deterioration of a firm’s credit rating;
7. (7) cross currency funding risk;
8. (8) risk that liquidity resources cannot be transferred across entities, sectors and countries;
9. (9) funding risks resulting from estimates of future balance sheet growth;
10. (10) franchise risk;
11. (11) marketable assets risk;
12. (12) non-marketable assets risk;
13. (13) internalisation risk; and
14. (14) intra-day risk.

11.6

A firm must ensure that its management body reviews regularly the stresses and scenarios tested to ensure that their nature and severity remain appropriate and relevant to the firm.

11.7

A firm must ensure that the results of its stress tests are:

1. (1) reviewed by its senior management;
2. (2) reported to that firm's management body, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action;
3. (3) reflected in the processes, strategies and systems established in accordance with 3.1;
4. (4) used to develop effective liquidity contingency plans;
5. (5) integrated into that firm's business planning process and day-to-day risk management; and
6. (6) taken into account when setting internal limits for the management of that firm's liquidity risk exposure.

11.8

A firm must report the results of its liquidity stress tests to the PRA in a timely manner.