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PRINCIPLES FOR THE INTERNAL LIQUIDITY ADEQUACY ASSESSMENT PROCESS (ILAAP)

Supervision Manual

De Nederlandsche Bank N.V.

Date: 1 July 2012

Version: 2.1 (replaces all previous versions1)

Language: Available in English and Dutch

Authors: P.L. de Neef, P.J.J. Baneke, J.F. van Wijck

Contact: via e-mail ILAAP@DNB.nl

1 See the Open Boek Toezicht website at www.dnb.nl for the most recent version.

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Contents

Introduction ..........................................................................................................................3 Why this manual?....................................................................................................................................... 3 How is this manual structured? ................................................................................................................. 3 What is the intention behind ILAAP and related reporting to DNB? ....................................................... 4 On what statutory standards is this manual based? .................................................................................. 4 How should the principle of proportionality be applied? .......................................................................... 4 What measures can DNB take? .................................................................................................................. 5 What information does DNB use in assessing the ILAAP? ....................................................................... 5 When is an institution eligible for exemption from an individual ILAAP?............................................... 5

I. Qualitative elements of the ILAAP ...................................................................................6 Introduction................................................................................................................................................ 6 I.1 Liquidity risk management: General Principles .................................................................................. 6 I.2 Liquidity risk tolerance (risk appetite) ................................................................................................. 8 I.3 Governance ........................................................................................................................................... 9 I.4 Fund Transfer Pricing: Liquidity costs, benefits and risk allocation ................................................. 12 I.5 Identification, measurement and management of liquidity risk ........................................................ 13

Section 5a: Future cash flows .................................................................................................................................. 14 Section 5b: Contingent liquidity demand in particular .............................................................................................. 14 Section 5c: Currencies in which the institution is active ........................................................................................... 16 Section 5d: Correspondent, custody and settlement activities ................................................................................... 16 Section 5e: Early warning indicators ....................................................................................................................... 16

I.6 Intra-group relationships and currency risks..................................................................................... 17 I.7 Funding strategy and market access ................................................................................................... 19 I.8 Intraday liquidity risk management ................................................................................................... 21 I.9 Collateral management ....................................................................................................................... 23 I.10 Stress testing ...................................................................................................................................... 25

Section 10a: The process of stress testing ................................................................................................................ 25 Section 10b: Scenarios and assumptions .................................................................................................................. 26 Section 10c: Behavioural assumptions ..................................................................................................................... 27 Section 10d: Utilisation of stress test results ............................................................................................................ 28

I.11 The Contingency Funding Plan (CFP).............................................................................................. 29 Section 11a: Statement of plan, procedures, roles and responsibilities....................................................................... 29 Section 11b: Communication plans ......................................................................................................................... 30 Section 11c: Content of the Contingency Funding Plan ............................................................................................ 30 Section 11d: Testing, updating and maintenance ...................................................................................................... 31

I.12 Liquidity cushions ............................................................................................................................. 32 I.13 Public disclosure................................................................................................................................ 34

II Quantitative elements of the ILAAP .............................................................................. 36 Introduction.............................................................................................................................................. 36 II.1 Limits and Liquidity risk tolerance (risk appetite) ........................................................................... 37 II.2 Liquidity mismatch and maturity calendars ..................................................................................... 39 II.3 Liquidity cushion: level and composition .......................................................................................... 41 II.4 Statutory minimum ratios: DNB test, LCR and NSFR..................................................................... 43 II.5 Stress Testing ..................................................................................................................................... 44

Section 5a: ILAAP stress scenarios ......................................................................................................................... 44 Section 5b: Use of stress test results ........................................................................................................................ 47 Section 5c: Explanatory notes on risk drivers........................................................................................................... 47

A: Wholesale funding risk .................................................................................................................................. 47 B: Retail funding risk ......................................................................................................................................... 49 C: Intraday liquidity risk ................................................................................................................................... 50 D: Intra-group and intra-company liquidity risk ................................................................................................. 51 E: Liquidity risk of marketable assets ................................................................................................................. 52 F: Liquidity risk of non-marketable assets .......................................................................................................... 53 G: Funding concentration risk and market access .............................................................................................. 54 H: Off-balance sheet items and related liquidity risk ........................................................................................... 55 I: Liquidity risk related to the reputational risk, business model and strategy ...................................................... 56 J: Foreign exchange liquidity risk (currency and FX swap risk) .......................................................................... 57

II.6 Early warning indicators ................................................................................................................... 58 II.7 Fund Transfer Pricing: allocation of liquidity costs, benefits and risk............................................. 59 II.8 The Funding Plan .............................................................................................................................. 60 II.9 The Contingency Funding Plan ......................................................................................................... 62 II.10 Use of central bank facilities ............................................................................................................ 64 II.11 Other relevant data.......................................................................................................................... 65 ANNEX 1: Transposition table for supervision standards and guidelines of the EBA and BCBS ......... 66

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Introduction This supervision manual describes how DNB will carry out its evaluation of the Internal Liquidity Adequacy Assessment Process (ILAAP) and is thereby directly connected with the Liquidity Policy Rule (Financial Supervision Act) 2011 (Beleidsregel liquiditeit Wft 2011). The evaluation of the ILAAP is part of the Supervisory Review and Evaluation Process (SREP). The manual gives insight into the elements of sound liquidity risk management on which DNB will base its assessment of whether an institution is compliant with the supervisory standards regarding the management of liquidity risk set out in Chapter 4 of the Decree on Prudential Rules under the Wft (Besluit prudentiële regels Wft). Why this manual? This manual explains what is expected of banks, clearing institutions and investment firms (institutions) in the context of ILAAP. The general requirement for all institutions to which the policy rule applies is that they ensure adequate risk management, including liquidity risk management. However this does not in itself answer the question of exactly what is expected of the institution and the supervisory authority. The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA, formerly the CEBS) have published various pieces of advice, directives, guidances and principles (all referred to below as principles) in order to define what can be expected of banks and supervisory authorities in relation to managing liquidity risk and supervising liquidity risk management. In the Liquidity Policy Rule (Financial Supervision Act) 2011, DNB determines that compliance with the standards for liquidity risk management will be assessed against these BCBS and EBA principles. As the principles consist of a set of separate publications and do not go into the same level of detail for all aspects, DNB has opted to use this manual to clarify what can be expected of institutions in the context of ILAAP. How is this manual structured? The manual is composed of two parts, which address the qualitative elements (Part I) and the quantitative elements (Part II) of the ILAAP. The qualitative elements describe, among other things, the expectations on governance relating to risk management with a focus on liquidity risk. These elaborate on such aspects as expectations relating to the strategies, procedures and measures and the liquidity cushions to be maintained by the institution. The structure of the qualitative part is based on the BCBS publication ‘Principles for Sound Liquidity Risk Management and Supervision’ of September 2008 and the related principles of the European Banking Authority (EBA). It focuses on convergence in supervisory practice in relation to liquidity supervision in the European Union. Part II elaborates on DNB’s expectations as regards the quantitative aspects of the ILAAP, which are directly linked to the qualitative elements. This part of the manual includes a look at limits, stress tests, maturity calendars, liquidity ratios and monitoring tools. In both parts, it is indicated for each section which statutory standard is being reviewed. Cross-references show what qualitative and quantitative elements should be read in conjunction.

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What is the intention behind ILAAP and related reporting to DNB? The ILAAP of an institution should ensure a robust management of liquidity risk. When reporting on the ILAAP to DNB, the institution is expected to give a description and internal assessment of the way in which liquidity risk is managed. This includes calculating the internally required minimum level of liquidity to be maintained, assessing the suitability of the current liquidity profile for the institution and the level of actual liquidity expressed in absolute amounts, ratios and limit breaches, etc. In this way, each institution must ensure that the current and future liquidity positions are adequate, even under stress, both for the institution itself and for its role in the financial system. To this end, the institution will draw up a liquidity risk profile based on the types of funding and assets, broken down according to product groups, counterparties, duration and currency. The profile will also provide insight into contractual mismatches, behavioural variables and funding gaps under normal and stressed circumstances. If the institution ascertains that the liquidity risk management has revealed vulnerabilities, it is expected to put forward a plan showing how and within what timeframe these will be mitigated.

On what statutory standards is this manual based? In assessing the risk management of an institution from the perspective of liquidity management and its governance, DNB focuses on the relevant statutory standards: the technical criteria relating to the management of liquidity risk and the evaluation of these criteria as set out in Annexes V and XI of the recast Banking Directive. The implementation of DNB’s supervision is based on the relevant principles drawn up by the BCBS and the EBA. This means that if an institution structures its risk management and its ILAAP in accordance with these principles, DNB’s evaluation may conclude that the risk management and the ILAAP are adequate.

How should the principle of proportionality be applied? In applying the principle of proportionality, the institution itself must put forward arguments for how it is applied and how that affects the degree to which the principles in this manual are applied. The supervisor will assess the choices made by the institution and their substantiation. In the explanatory notes to the Liquidity Policy Rule (Financial Supervision Act) 2011, the following factors are cited as relevant for DNB’s assessment of the application of the proportionality principle:

� The size of the institution, both in absolute terms and in relation to the financial system in the Netherlands.

� The nature of the activities and the risk profile of the institution. � The ratio of the liquidity cushions considered necessary by DNB on the basis of the

evaluation (or a previous evaluation) to the liquidity cushions actually kept or, as the case may be, the liquidity cushions considered necessary by the institution on the basis of the ILAAP. The smaller the difference between the SREP liquidity and the ILAAP liquidity or the actual liquidity, the greater the chance of a shortfall and the greater the required depth of the SREP.

� As regards Dutch-based group companies, the extent of the integration with the foreign parent company and the quality of the ILAAP concerning the position of the institution on a group-wide basis.

� For institutions that are part of a foreign group company: the extent of the integration of the business operations and the risk management.

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What measures can DNB take? If vulnerabilities are identified on evaluating the ILAAP, DNB can give instructions to address the failings found. The explanatory notes to the Liquidity Policy Rule (Financial Supervision Act) 2011 set out examples of measures that DNB can take if failings are not addressed or not in time, or if those failings involve immediate unacceptable risks. This relates to higher capital and/or liquidity requirements or instructions relating to the composition of the liquidity cushion or the funding structure. If DNB takes the view that there is an increased liquidity risk for the institution or for the sector as a whole, (some of) the information needed in the context of the ILAAP may be requested between two regular ILAAP reporting times. What information does DNB use in assessing the ILAAP? In assessing the ILAAP, DNB will base its evaluation on the information that the institution has provided for that purpose. When requesting submission of the documentation required for its assessment of the ILAAP, DNB will indicate exactly what documentation it expects to receive from the institution. Please see the Annex 3 “ILAAP-package: Contents & Delivery” for further information regarding the required documents. In assessing the ILAAP, DNB may also use information acquired from other sources such as:

� Information from the DNB liquidity report. � The BCBS and EBA reports relating to progress towards the Liquidity Coverage Ratio

(LCR) and the Net Stable Funding Ratio (NSFR). � Additional (internationally developed) monitoring instruments (for example a maturity

calendar, tools for measuring concentration risk and market indicators). When is an institution eligible for exemption from an individual ILAAP? The basic principle is that institutions must comply with the policy rule individually and on a group basis. The institution can request an exemption from DNB from the application of the ILAAP at the individual level, if the information DNB would acquire through the individual ILAAP is integrated in the group-wide ILAAP submitted to DNB. If the supervisor agrees to this, the institution need not carry out and report on the individual ILAAP to DNB. This can only apply to subsidiaries of Dutch banks that do report on ILAAP to DNB on consolidated basis.

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I. Qualitative elements of the ILAAP Introduction This part of the supervision manual is structured based on the first 13 Principles for Sound Liquidity Risk Management and Supervision formulated by BCBS and dated September 2008. For each section or sub-section, reference is made to the relevant supervisory standard as set out in Annex V to the recast Banking Directive. This manual does not provide every detail of the principles. If these specific details are needed for the assessment of an institution’s ILAAP, the text of the BCBS and EBA principles should be consulted. An overview of the relevant BCBS and EBA publications is included in the Annex to the Liquidity Policy Rule (Financial Supervision Act) 2011. I.1 Liquidity risk management: General Principles (Recast Banking Directive, Annex V, points 2 and 14 and BCBS Principle 1) (See also Part II of this Manual) Principle A bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. Evaluation objective The institution must have a policy plan for robust liquidity risk management, laid down in procedures and measures that also provide for the maintenance of an adequate cushion of unencumbered, highly liquid assets of high quality for a variety of circumstances. The relevant risk management is integrated in the institution’s business processes. Assessment criteria

i) The liquidity risk management is anchored in strategies, procedures and measures for liquidity risk management that are integrated into the institution’s business processes and organisational structures. These strategies, procedures and measures take into account the impact on liquidity risk of the various types of financial risks to which the institution is exposed. In this connection the potential or actual liquidity needs versus the liquidity generating capacity via assets and liabilities, including off-balance sheet items, in currencies relevant to the institution, are also taken into account. The impact is examined over various time horizons and management tools suitable for the purpose are applied, such as limits and early warning indicators.

ii) The liquidity risk management has been elaborated in a liquidity policy plan setting out the strategy in relation to the management of liquidity risk in the very short term (intraday and overnight), the short term (week, month) and the longer term, singling out the period of the first year. With regard to controls for stressed business conditions, the horizons applied by the institution are set out, and the way in which the institution intends to provide for adequate liquidity cushions and their maintenance under normal and stressed business conditions, with time horizons of one week, one month and longer periods, suiting the institution’s risk profile, are expressed in funding requirements in currencies relevant to the institution. The liquidity policy plan also contains a liquidity plan stating

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how the liquidity position of the institution is expected to develop, under normal and stressed business conditions, and how this matches with the institution’s own risk tolerance and progress towards the international liquidity standards, the LCR with effect from 2015 and the NSFR with effect from 2018.

iii) The liquidity risk management guarantees that the strategies, procedures and measures as well as the size, composition and distribution of the liquidity cushions are appropriate for the chosen risk tolerance (see I.2), suiting the nature, complexity and diversity of the institution’s activities and financing structure. Assumptions are made explicit.

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I.2 Liquidity risk tolerance (risk appetite) (Recast Banking Directive, Annex V, points 14 and 14a and BCBS principle 2) (See also Part II section 1 of this Manual) Principle A bank should clearly articulate a liquidity risk tolerance that is appropriate for its business strategy and its role in the financial system. Evaluation objective The institution has set a clear liquidity risk tolerance that is appropriate for its business objectives, strategic direction and overall risk tolerance (risk appetite) and for its role in the financial sector. Assessment criteria i) The Board of Directors and Supervisory Board are ultimately responsible for the liquidity

risk assumed by the institution and the manner in which the risk is managed. This also includes responsibility for the risk tolerance. This involvement should be evidenced in recorded material.

ii) The liquidity risk tolerance does not stand alone, but is integrated into the institution’s

overall risk tolerance and is appropriate for its business model, the strategy pursued and the role of the institution in the financial sector.

iii) In determining the liquidity risk tolerance, the institution’s financial condition and funding

capacity are taken into account. The criteria used provide an understanding of the trade-off between profits and risks.

iv) The liquidity risk tolerance is articulated in such a way that all levels of management

clearly understand the trade-off between risks and profits. v) The liquidity risk tolerance is expressed in qualitative and quantitative terms, and in any

event includes a grace period or survival period under various clearly described stressed business conditions.

vi) In determining the liquidity risk tolerance, in principle the institution does not assume the

use of Central Bank liquidity in the short term. Central Bank facilities can only be used in determining the liquidity risk tolerance for intraday liquidity and for very extreme stressed conditions.

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I.3 Governance (Recast Banking Directive, Annex V, points 14 and 14a and BCBS principle 3) Principle Senior management should develop a strategy, policies and practices to manage liquidity risk in accordance with the risk tolerance and to ensure that the bank maintains sufficient liquidity. Senior management should continuously review information on the bank’s liquidity developments and report to the board of directors on a regular basis. A bank’s board of directors should review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively. Evaluation objective The business operations relating to liquidity risk management include a clear and adequate organisational structure in accordance with the institution’s risk tolerance. There must be a clear division of tasks, powers and responsibilities, an independent control function in relation to the effectiveness of the organisational structure and the measures and procedures (internal audit function), an independent compliance function and an independent risk management function. There are no incentives for personnel involved in liquidity risk management and its daily implementation that could give rise to interests conflicting with prudent liquidity risk management. Assessment criteria

i) The institution ensures the availability of adequate personnel capacity and adequate resources for up-to-date IT support and has independent internal control, audit and compliance functions.

ii) The risk tolerance has been defined at the highest management level (the Board of Directors) in accordance with the provisions of I.2 and has been communicated to the Supervisory Board and all relevant bodies within the institution.

iii) The risk management policy set by the Board of Directors (or by senior management as delegated to for that purpose) has been translated into strategies, procedures and measures to manage liquidity risk that have been articulated in accordance with the risk tolerance and checked internally in an independent way for any failings or deficiencies, and has been communicated to the Supervisory Board and all relevant bodies within the institution.

iv) The relevant strategies, procedures and measures provide adequately for regular evaluation of the liquidity situation and reporting of the evaluation results to the highest management level, with adequate feedback to the relevant management frameworks (senior management).

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v) These strategies, procedures and measures specify the liquidity risk management, for example by including the intended composition and maturity of assets and liabilities within certain limits, the intended diversity of funding sources, the approach to different currencies and geographical locations of assets and liabilities, the relationship between the various business lines of the institution and between the various legal entities within a group of which the relevant institution is part, the procedures and measures aimed at intraday liquidity management and the assumptions on the marketability of assets.

vi) The strategies take account of normal circumstances and circumstances involving institution-specific stress and market-wide stress or a combination of the two.

vii) The Board of Directors ensures the effectiveness of the organisational structure and the division of tasks, powers and responsibilities.

viii) The strategy takes into consideration any current or foreseen practical or legal restrictions on the immediate transfer of funds between the various business lines of the institution or between the various legal entities of a group of which the relevant institution forms part. The strategy is appropriate to the breadth and diversity of markets, products and jurisdictions in which the institution operates, and home and host regulatory requirements.

ix) If the institution forms part of a group, the risk management is aimed at managing liquidity risk on a group-wide basis. Risk management at entity level is consistent and is well integrated into group-wide risk management. In this connection tasks, powers and responsibilities are adequately vested.

x) There are adequate guarantees that the relevant management levels (the senior management and the highest level of executives) have a good understanding of the links between the funding risk and the market liquidity risk, as well as how other risks, including credit, market, operational and reputation risks, affect the liquidity position of the institution.

xi) There are adequate guarantees that in communicating the strategies, procedures and measures to all relevant bodies within the institution, it is ensured that the individuals responsible for liquidity risk management are in contact with the individuals assessing market developments or developments relating to credit risk. The interactions between risks are monitored by the institution’s independent risk management function.2

xii) The integrity of the risk management must be adequately safeguarded by an organisational entity that exercises an independent and effective compliance function, and the effectiveness of the organisational structure must be independently reviewed at least annually by an organisational entity of the institution that carries out this internal control function (audit function). Annex 2 provides an indication of the tasks expected from the internal audit department (this is the Argeed Upon Procedures document that was agreed upon by DNB and the NVB for the first ILAAP round).

xiii) The integrity risks are systematically analysed and the integrity policy relating to liquidity risk management has been laid down in procedures and measures and the institution ensures that the implementation of the integrity policy is independently monitored. This independent monitoring means that the organisational entity carrying it out cannot have any profit motive. The same applies mutatis mutandis to the internal audit and compliance functions.

2 Compare the independent risk management function required under Article 23, section 6 of the Decree on Prudential Rules under the Wft.

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xiv) Conflicts of interests in carrying out the liquidity risk management policy are prevented or adequately mitigated. A primary profit motive when carrying out daily liquidity risk management involves the risk that adequate risk-mitigating action is not taken in time or is not taken at all. Liquidity risk management and its implementation should therefore take place in a ‘cost centre’, unless the institution structures its organisation in such a way that the same effect is achieved in relation to ensuring that the incentives of the individuals responsible for the implementation of the liquidity risk management, as well as the incentives of their managers, are conducive to obtaining and maintaining a prudent liquidity position. The remuneration policy takes account of possible conflicts of interests.

xv) The Board of Directors and the Supervisory Board receive regular timely reports on the institution’s liquidity position and related matters such as any increase in funding costs, a funding concentration or funding gap, the drying up of alternative sources of liquidity, material breaches of limits, a significant decline in the cushion of unencumbered, highly liquid assets, or changes in external market conditions that are relevant to liquidity risk management. Arrangements are in place for the recording of the assessments by and conclusions of the Board of Directors and Supervisory Board.

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I.4 Fund Transfer Pricing: Liquidity costs, benefits and risk allocation (Recast Banking Directive, Annex V, point 14, BCBS principle 4) (See also Part II section 7 of this Manual) Principle A bank should incorporate liquidity costs, benefits and risks in the product pricing, performance measurement and new product approval process for all significant business activities (both on- and off-balance sheet), thereby aligning the risk-taking incentives of individual business lines with the liquidity risk exposures their activities create for the bank as a whole. Evaluation objective Adequate procedures are followed for the identification of liquidity risks assumed at product level and at the level of the different business lines, and a price is charged internally for the relevant risks, proportionate to those risks. The Fund Transfer Pricing (FTP) mechanism actually works in practice as described in the policy documentation. Assessment criteria

i) The institution makes use of a system of attribution of internal liquidity costs and benefits, a form of Fund Transfer Pricing (FTP) which ensures that when the various business lines undertake business activities based on price incentives, adequate allowance is made for the liquidity risk of the various activities and positions, including off-balance sheet positions (for example liquidity facilities, repurchase obligations, guarantees, and other forms of credit enhancement such as additional collateral obligations if market risk or counterparty credit risk-related threshold values are exceeded). The liquidity-related costs, benefits and risks are measured for all business activities and incorporated in internal pricing and the operational results for each business line. The maintenance of collateral is also involved in the relevant system.

ii) The liquidity-related costs, benefits and risks are also addressed in the new product approval process, in line with the characteristics of the various products and in line with the risk tolerance adopted.

iii) The internal FTP system is an integrative part of the liquidity risk management framework and anchored in the organisational structure; the results of the attribution mechanism are used in accordance with the business profile of the institution, and the FTP system has been approved by the Board of Directors and Supervisory Board.

iv) The internal audit function assesses the internal FTP system at least annually; failings are identified and reported to the Board of Directors, leading to appropriate adjustments. The report of the relevant internal audit is available to the supervisor.

v) The quantification and allocation of the risks arising out of the FTP are communicated to all relevant entities of the institution.

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I.5 Identification, measurement and management of liquidity risk (Recast Banking Directive, Annex V, points 14, 14bis and 15; BCBS principle 5) (See also Part II sections 2, 3, 4, 6 and 8 of this Manual) Principle A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons. Evaluation objective The institution has adequate procedures and measures for identifying, measuring and controlling liquidity risk in the very short, medium and longer term. Assessment criteria

i) The liquidity risk is identified and described in all business lines of the institution, including its branches and subsidiaries. Large on- and off-balance sheet items are evaluated separately.

ii) The interactions between exposures to funding liquidity risk and market liquidity risk, and between exposures to liquidity risk and other risks such as interest rate, currency, credit, operational, legal and reputation risks, are taken into account, as is the liquidity volatility of the various market segments under normal and stressed business conditions, and the possible vulnerability resulting from concentrations in forms of wholesale financing, particularly in the short term, both unsecured and secured with collateral.

iii) The institution has adequate measurement tools, i.e. a range of suitable measurement tools for assessing the current and possible future liquidity position, taking into account the current and possible future maturity structure of the various assets and liabilities and off-balance sheet items.

iv) The procedures and measures for liquidity risk management include a system of limits commensurate with the risk tolerance adopted by the institution – where necessary at the level of separate business lines, branches or subsidiaries of the institution. Limits are also used in normal circumstances in daily liquidity management, both within and across business lines, and take account of the nature of the products and markets in which activities are undertaken (including currency). An example of a common type of limit is the limitation of cumulative contractual cash flow mismatches (for example the cumulative net funding requirement as a percentage of total liabilities) over various time horizons. This allows estimates to be made of drawings under committed lines and other obligations. Relevant procedures and measures (such as limits and escalation procedures) are regularly evaluated and contain measures intended to ensure that the institution can continue to function in a period of market stress, institution-specific stress or a combination of both.

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v) The institution has a reliable management information system (MIS) that provides the Board of Directors and all relevant parts of the institution with sufficient timely information on the amount, composition and distribution of the institution’s current and possible future liquidity position in all relevant currencies over an appropriate series of time horizons – on an intraday basis, from day to day, in the shorter term and over a series of longer periods. It is important here how the information provision has been specified and what its scope is. What information is available on a group-wide basis and what is available at the level of subsidiaries and branches abroad? What are the possibilities for increasing the intensity, level of detail or frequency? Is the information on use, application and limit breaches passed on? Is the MIS used enough to monitor compliance with policy plans, etc.?

vi) There should also be a system of early warning indicators so as to identify increased risk or vulnerabilities in the institution’s current and possible future liquidity position.

Below is a further explanation of the assessment criteria referred to, in relation to the potential liquidity needs arising out of:

a) future cash flows; b) off-balance sheet contingent liabilities; c) currencies in which the institution is active; d) correspondent, custody and settlement activities and e) early warning indicators.

Section 5a: Future cash flows With regard to future cash flows, the institution ensures that actual and potential liquidity needs are determined on the basis of:

� Projections of cash flows in relation to the various assets and liabilities, over an appropriate series of time intervals, from intraday to a horizon appropriate to the institution’s risk profile (minimum 1 year).

� Substantiated assumptions about future liquidity needs and presumed behavioural patterns of important counterparties in the event of changes in credit conditions, taking into account the nature and geographical location of creditors, their connection with the institution (multiple or single financial relationships, or operational link), and taking into account the deposit channel (direct, internet or brokered), deposit guarantee schemes, level of penalty clauses and similar.

Section 5b: Contingent liquidity demand in particular

Contingent liquidity demands are liquidity demands that may arise out of a range of events named in contractual conditions. In some cases however a liquidity demand may arise, not out of events included in a contract, but because the institution feels itself obliged to give support for reasons of reputation and/or to keep funding channels open. In this connection the institution will ensure:

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General:

� The identification, measurement and control of potential cash flows arising out of off-balance sheet liabilities, taking account of correlated (counterparty) credit risk and currency mismatches.

� The identification and assessment of liquidity needs arising out of liability clauses on the sale of securitisations, the extension of liquidity facilities to securitisation programmes and the conditions for possible early repayment.

� The identification and assessment of the nature and scope of potential non-contractual liabilities in practice as against third parties, focused on preventing reputation damage (investment funds) or keeping funding channels open (securitisations placed via SPVs).

� The identification and assessment of ‘trigger events’ that could affect the liquidity of the institution. In this context trigger events are events laid down contractually that enable facilities to be drawn upon and thus may create a liquidity need. Specific: Contingent liquidity demand due to Special Purpose Vehicles (SPVs, including Special Investment Vehicles and similar):

� The identification and assessment of the contingent liquidity risks due to associated SPVs, regardless of whether the SPV is consolidated for accounting purposes.

� The identification and assessment of the cash flows of associated SPVs due to liquidity drawdowns and their significance as part of the institution’s own liquidity planning if the institution provides the SPV with contractual liquidity facilities.

� Assessment of the availability of securitisation SPVs as a funding source in drawing up liquidity forecasts.

Specific: Contingent liquidity demand arising out of financial derivatives:

� The incorporation of cash flows relating to the repricing, exercise or maturity of financial derivatives in the liquidity risk analysis, including potentially obligatory additional collateral in the event of a credit rating downgrade or a decline in the value of the underlying asset.

Specific: Contingent liquidity demand arising out of guarantees and commitments

� The identification and assessment of liquidity needs due to loan commitments, letters of credit and guarantees.

� The identification and assessment of loan commitments or guarantees provided by third parties, which are significant for example for the creditworthiness of collateral that the institution has used in drawing down funding, whereby the bank has to post additional margin if the value of the collateral is under pressure.

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Section 5c: Currencies in which the institution is active

� The identification and assessment of the total liquidity needs in the currencies relevant to the institution, ascertaining the actual size and maximum permitted size of foreign currency mismatches, the possibilities of additional funding – including, separately, funding based on emergency facilities from various central banks3, and the transfer of a liquidity surplus from one currency to another and across jurisdictions and legal entities associated with the institution, as well as the likely convertibility of the currencies concerned taking into account impairments in the foreign exchange swap markets for particular currency pairs.

� The identification and assessment of the liquidity risks arising out of the use of foreign currency deposits and short-term credit lines to fund domestic currency assets or vice versa, taking account of the effectiveness of foreign exchange hedging strategies.

Section 5d: Correspondent, custody and settlement activities

� The identification and assessment of the way in which correspondent, custodian and settlement activities may influence liquidity needs, including liquidity needs arising out of problems in payment and settlement systems in which the institution is a participant.

Section 5e: Early warning indicators

Early warning indicators can include, among other things, the following: � Rapid growth in assets, especially when funded by volatile liabilities. � Growing concentrations in assets or liabilities. � Increases in currency mismatches. � A decrease of weighted average maturity of liabilities. � Repeated incidents where position limits are approached or breached. � Negative trends or heightened risk associated with products or financial services of the

institution. � Deterioration in profits and volatility of results in business lines with a generally high

profit contribution, deterioration of the financial position or quality of assets. � Negative publicity. � A possible or actual downgrade in the institution’s credit rating. � A decline in the value of shares in the institution, or higher funding costs. � Rising wholesale and retail funding costs and widening debt or credit-default-swap

spreads. � Counterparties requiring additional collateral. � Correspondent institutions that cancel or reduce their credit facilities. � Increasing retail deposit outflows from the institution or associated parties. � Increasing redemptions of deposits / certificates of deposits before maturity. � More difficulty accessing longer-term funding. � Difficulty placing short-term liabilities (e.g. commercial paper).

3 The institution must be in a position to make it clear what possibilities there are to obtain funding in the market, before considering the use of central bank facilities.

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I.6 Intra-group relationships and currency risks (Recast Banking Directive, Annex V, points 16 and 17, BCBS principle 6) (See also Part II section 5 of this Manual) Principle A bank should actively manage liquidity risk exposures and funding needs within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity. Evaluation objective The supervisor will ascertain whether risks arising out of intra-group relationships and currency mismatches are being adequately identified, measured and controlled. There should be a sufficient spreading of liquidity within the group on the basis of realistic principles on the transferability of liquidity. General note The treatment of intra-group relationships and currencies can strongly influence the measured extent of the liquidity risk to be managed at the central or entity level. The supervisor will therefore pay attention to the assumptions that are applied in relation to the liquidity value attributed to cash flows related to intra-group receivables, in view of possible ring-fencing at times of stress. This also applies to the assumptions in relation to the liquidity value of intra-group commitments. In this connection it is not only the relationships between independent entities that are important, but also intra-company relationships with cross-border entities. Assessment criteria

i) Risk management is focused on controlling liquidity risk in all parts of the institution (including foreign branches) and in the group of which the institution is part. This is coherent and well integrated so that the level, composition and distribution of the liquidity suit the size, nature and distribution of the institution’s liquidity demand, on an individual basis and on a group basis, with restrictions on the transferability of liquidity within the group being identified and controlled. Account is also taken of the transfer risk (public restrictions on moving liquidity).

ii) The risk management of intra-group limits considers and takes account of the local legislation of all states in which the institution is active (local regulatory requirements, the collateral policy of the local central bank, deposit guarantee schemes, legislation on insolvency and similar).

iii) The risk management provides for adequate procedures for the transfer of liquidity in case a local stress situation arises.

iv) In all cases where entities are reliant on funding from other entities within the group, the risk management takes account of possible restrictions on the transfer of funds or collateral as a result of legal and tax provisions, supervisory regulations or accounting or credit restrictions.

v) Adequate controls are in place to mitigate local reputational contagion at the entity level (for example by a system of internal limits) so that the risk remains within the risk tolerance adopted by the Board of Directors / Supervisory Board.

vi) The institution’s policy plan provides for effective communication with counterparties, credit ratings agencies and other stakeholders, in order to combat reputational damage as a result of contagion risks if liquidity problems arise.

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vii) The specific market characteristics and liquidity risks of foreign exchange positions are taken into account, particularly where there is no fully developed foreign exchange market, as well as the risk that the currency swap market can erode rapidly under stressed conditions. The assumptions about the transferability of funds and collateral, including the time taken up by these, are recorded in a transparent fashion.

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I.7 Funding strategy and market access (Recast Banking Directive, Annex V, point 18; BCBS principle 7) (See also Part II sections 5 and 10 of this Manual) Principle A bank should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers to promote effective diversification of funding sources. A bank should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid. Evaluation objective The supervisor will verify whether the available funding sources have been diversified, and are adequately accessible for the institution under various circumstances, and that the institution is conducting a well-considered policy on this. The supervisor will also assess the degree to which the institution is endeavouring to keep access to a variety of funding sources by using them regularly. Assessment criteria

i) The funding sources in the various time segments have been diversified according to type (instrument), counterparty, currency and geographic market, and are actually accessible to the institution, taking into account correlations between sources of funds and market conditions.

ii) The desired diversification is achieved through the use of different instruments, including the application of limits by type of lender or counterparty (retail/wholesale), presence or absence of deposit guarantee scheme, ongoing or occasional customer relationship, secured or unsecured market funding, instrument type, securitisation vehicle, currency and geographic market.

iii) The relevant (senior) management is actively engaged in the composition, characteristics and diversification of the funding sources and regularly evaluates the funding strategy.

With regard to the requirement to ensure good market access, the following criteria apply:

iv) The (senior) management ensures that market access is actively managed, monitored and tested. The institution maintains an active presence in the markets relevant to it, so that market access is safeguarded under normal and stressed business conditions. The institution identifies and quantifies alternative funding sources that strengthen its capacity to withstand a range of severe but not improbable institution-specific and market-wide liquidity shocks, for example through deposit growth, the lengthening of the average maturity of liabilities, new issues of short and long-term debt instruments, asset securitisation, the sale or pledging of unencumbered, high-quality assets, the draw-down of credit facilities and borrowing from the central bank’s marginal lending facilities based on more widely defined central bank ‘eligible’ collateral.

v) Knowledge of the primary and secondary legislation governing the various market sectors is regularly updated around potential asset sales, and the institution ensures that the relevant documentation is reliable and legally robust.

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vi) The institution regularly evaluates its potential funding sources and tests them to ascertain their effectiveness at providing liquidity in the short, medium and long term, and to ensure that there is not an over-reliance on the securitisation of assets or the sale of assets or their use as collateral in the market. There is also no over-reliance on internal securitisation with the aim of borrowing from central banks, except in cases of extreme liquidity crises.

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I.8 Intraday liquidity risk management (Recast Banking Directive, Annex V, 14-22; BCBS principle 8) (See also Part II section 5 of this Manual) Principle A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Evaluation objective The supervisor will assess the quality of the intraday liquidity management, taking into account the role of the institution in the financial sector and in particular the role of the institution in payment and settlement transactions. Assessment criteria

i) Intraday liquidity management is an important component of the institution’s broader liquidity risk management.

ii) The risk management is not only focused on preventing (possibly serious) damage to the institution’s own liquidity position, but also takes into account the damage to other parties which can arise through chain effects in payment and securities transactions.

iii) The management systems identify time-specific and other critical obligations as well as possible (such as posting additional margin or payments of crucial importance for reputation). The intraday liquidity management is designed to prioritise time-critical payments and to provide timely cover in the form of intraday funds, borrowing from the central bank or elsewhere, taking account of uncertainties in relation to the size and timing of intraday cash flows in connection with uncertain cash inflows and outflows. The last point applies a fortiori if the institution acts as correspondent bank or custodian, whereby the activities of customers form part of the cash flows, or due to the more or less uncertain times of gross cash inflows and outflows connected with participation in divergent payment systems, where outgoing payments, and their timing, are determined by counterparties (or their correspondent bank) and customers’ possible payment problems.

iv) If the choice has been made to carry out payment and securities settlement activities via correspondent or custodian banks, the institution ensures that this allows it to comply with its intraday and other obligations on time under normal and stressed business conditions.

v) The management of intraday liquidity includes the following six operational elements: ▪ An adequate assessment of the incoming and outgoing cash flows, their timing and the

resulting funding shortfalls or surpluses, with particular attention to the cash flows resulting from the institution’s participation in payment and settlement systems.

▪ An adequate tool to monitor significant intraday liquidity positions. ▪ Adequate (sufficiently diversified) intraday funding, where necessary in different

currencies and taking account of access to the central bank(s). ▪ Adequate management of collateral and the possibility of mobilising collateral in time

to obtain intraday funds.

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▪ Adequate capability to manage the timing of outgoing liquidity outflows in a variety of circumstances in line with its intraday objectives. It is important for an institution to be able to manage the timing of payment outflows of important customers and, where customers are being provided with intraday credit, that the credit acceptance procedures can be completed in time. Internal coordination across business lines is important to achieve effective controls over liquidity outflows.

▪ An adequate capacity to withstand unexpected disruptions in intraday incoming and outgoing cash flows under stressed business conditions and the maintenance of an up-to-date contingency funding plan.

vi) The institution has procedures and measures to support these operational elements in the markets and currencies relevant to it. These procedures and measures are tailored to the institution’s strategy, business model and risk tolerance and its role in the financial system, the way in which it conducts its business in a specific market (e.g. via direct participation in a payment and/or settlement system or via correspondent or custodian banks), and whether it provides correspondent or custodian services or intraday credit facilities to banks, institutions or systems. If the institution is heavily reliant on collateralised funding, for example, it is taken into account that monitoring positions in a securities settlement system can be just as important as monitoring positions in high-value payment systems. The institution has an insight into the level of and movements in liquidity needs that may arise as a result of failure to settle procedures in payment and securities settlement systems in which it participates directly.

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I.9 Collateral management (Recast Banking Directive, Annex V, point 16; BCBS principle 9) (See also Part II section 3 of this Manual) Principle A bank should actively manage its collateral positions, differentiating between encumbered and unencumbered assets. A bank should monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner. Evaluation objective The supervisor will assess the adequacy of the collateral management given the importance of the timely availability of liquidity at the right location within the banking or other group and for the payment and settlement systems in which the institution participates. The supervisor will assess whether the institution has an overview of the overall collateral position, differences in the quality of that collateral and the degree to which the collateral is already encumbered. Assessment criteria

i) The risk management includes procedures and measures that enable the institution to calculate all its collateral positions, including assets pledged relative to the potential or actual amount of security required and all unencumbered assets available as collateral.

ii) The amount of available collateral is managed on an intraday basis both individually and group-wide, per legal entity, jurisdiction and currency, and the system is capable of monitoring shifts between intraday and overnight or term collateral use.4

iii) The eligibility of the most important groups of assets is assessed for pledging as collateral in credit transactions with the central bank (for intraday credit, overnight and term lending operations as well as borrowing under standing facilities) and the acceptability of assets to important counterparties and funds providers in secured funding markets.

iv) Sources of collateral are diversified, taking into consideration capacity constraints / the availability of different sources, and the impact of name-specific concentrations, price sensitivity, haircuts and collateral requirements under conditions of name-specific and/or market-wide stress, and taking into consideration the availability of funds from private sector counterparties in various market stress scenarios.

v) The institution adjusts its estimates of available collateral to account for assets that are part of a ‘tied position’ (i.e. assets used as part of a hedge of an off-balance sheet or derivative position, such as an equity/debt position as a hedge to a total return swap or a negative basis trade). The institution demonstrates a good understanding of the estimated period of time needed to liquidate those assets or put on a substitute hedge.

vi) The institution can meet a range of collateral needs, including those for longer-term structural, short-term and intraday purposes. In this connection the institution has sufficient collateral to meet expected and unexpected funding shortfalls and potential increases in margin requirements over different time frames, depending upon the bank’s funding profile.

94 In some cases collateral that is pledged to a central bank can be used to cover intraday, overnight or longer-term credit. A given asset can only be used as collateral for a single type of credit facility at one time, so that effective collateral management is advisable in view of the competition between different applications.

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vii) Collateral requirements and limits on intraday credit are monitored to ensure the ability to make payments in time, in accordance with the principle in I.8. In this connection consideration is given to the amount of collateral to pledge or deliver, due to the potential for significant uncertainty around the timing of intraday cash flows, as well as the potential size and frequency of liquidity disruptions that could necessitate the pledging or delivery of additional intraday collateral.

viii) If derivatives are used, the institution takes into account the potential size of possible additional collateral requirements after changes in market positions or in the institution’s credit rating or financial position. It is also expected that other trigger events will be monitored; for example, in the case of funding through asset securitisation, the triggers that may give rise to the need to hypothecate or deliver additional assets. The information systems should be able to report whether the institution has sufficient unencumbered assets of the right type and quality to allow it to withstand such a contingency.

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I.10 Stress testing (Recast Banking Directive, Annex V, points 18, 19 and 20; BCBS principle 10) (See also Part II section 5 of this Manual) Principle A bank should conduct stress tests on a regular basis for a variety of institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that current exposures remain in accordance with a bank’s established liquidity risk tolerance. A bank should use stress test outcomes to adjust its liquidity risk management strategies, policies, and positions and to develop effective contingency plans. Evaluation objective The supervisor will assess the adequacy of the institution’s framework for carrying out stress tests, the plausibility of the stress scenarios and the way in which the framework is integrated into the institution’s business processes. Specific attention is given to the way in which outcomes of stress tests are used by the institution as part of the liquidity risk management. General note The institution will ensure that the liquidity position is managed under normal circumstances and also that it is prepared to manage liquidity under stressed conditions. To the latter end, the institution performs stress tests and scenario analyses on a regular basis. The results of these stress tests play a key role in drawing up contingency funding plans (CFPs) and in determining the strategy and tactics to deal with events of liquidity stress. As a result, stress testing and the development of CFPs are closely intertwined. The following elements of stress testing are further examined below:

a) stress testing process; b) scenarios and assumptions; c) behavioural assumptions; d) utilisation of stress test results.

Section 10a: The process of stress testing

Assessment criteria

i) The stress tests allow the institution to analyse the impact of stress scenarios on its consolidated, group-wide liquidity position and on the liquidity position of individual entities and business lines. It is important for the institution to understand where risks could arise, regardless of its organisational structure and the degree of centralised liquidity risk management. The institution assesses whether additional tests are needed for individual entities (subsidiaries and branches) that are exposed to significant liquidity risks. The tests consider the consequences of the scenarios over different time horizons, including on an intraday basis.

ii) The extent and frequency of testing is commensurate with the size and complexity of the institution and its liquidity risk exposure, as well as with its relative importance within the financial sector.

iii) Senior management, including the Board of Directors, is actively involved and demands that rigorous and challenging stress scenarios are considered, even if the actual circumstances are normal and liquidity is plentiful.

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Section 10b: Scenarios and assumptions

Assessment criteria

i) In designing the stress scenarios, the institution takes into consideration the nature of its activities, concentrations and vulnerabilities in relation to its business model, funding risks and market risks so that the scenarios enable the institution to evaluate the potential adverse impact of these factors on its liquidity position.

ii) Careful consideration is given to the design of stress scenarios and the variety of shocks simulated in them. When designing stress tests, an institution must not only consider the past, but also make use of hypotheses based on expert judgement. This means that the institution considers both short-term and protracted, and both institution-specific and market-wide (occurring simultaneously in a variety of markets) stress scenarios and a combination of both (for more detail see the sections below).

iii) The institution takes into account the link between reductions in market liquidity and constraints on access to funding liquidity, particularly if the institution has a significant market share in, or is heavily reliant upon, specific funding markets. In stress testing its liquidity position, the institution considers the insights and results of stress tests performed for various other risk types as well as possible interactions with these.

iv) The institution recognises that stress events may simultaneously give rise to time-critical liquidity needs in multiple currencies and multiple payment and settlement systems. These liquidity needs can be caused by both the institution’s own activities, and those of its banking and other business customers (e.g. when the institution acts as correspondent for other institutions’ settlement obligations). They can also arise from special roles the institution may play in a particular settlement system, such as acting as a back-up liquidity provider or settlement bank.

v) The tests reflect accurate or prudent time-frames for the settlement of any assets to be liquidated or for the cross-border transfer of liquidity.

vi) The institution considers the risk that operational or financial disruptions may prevent or delay funds flows across systems to the extent that it relies on liquidity outflows from one system to enable it to meet obligations in another, particularly if the institution relies on intra-group transfers or centralised liquidity management.

vii) The institution takes a conservative approach in setting stress testing assumptions. Depending on the type and severity of the scenario, the institution is expected to consider the appropriateness of a number of assumptions, including those based on the following illustrative but not exhaustive examples: ▪ asset market illiquidity and erosion of the value of liquid assets; ▪ the run-off of retail funding; ▪ the degree of availability of secured and unsecured wholesale funding; ▪ the correlation between funding markets and the effectiveness of diversification across

different sources of funding; ▪ additional margin calls and collateral requirements; ▪ funding tenors (for example where the funding provider has call options); ▪ contingent claims and more specifically, potential draws on committed credit lines

extended to third parties or the institution’s subsidiaries, branches or head office; ▪ the liquidity absorbed by off-balance sheet entities and activities (for example conduit

financing); ▪ the availability of contingent credit lines extended to the institution ; ▪ liquidity drains associated with complex products/transactions; ▪ the impact of any deterioration of the institution’s credit rating;

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▪ FX convertibility and access to foreign exchange markets; ▪ the ability to transfer liquidity across entities, sectors and countries taking into account

legal, regulatory, operational and time-zone restrictions and constraints; ▪ access to domestic and foreign central bank facilities; ▪ the operational ability of the institution to monetise assets; ▪ the institution’s remedial actions and the availability of the necessary documentation

and operational expertise and experience to execute them, taking into account the potential reputational impact resulting from executing these actions;

▪ estimates of future balance-sheet growth;

viii) The stress scenarios include stress on the liquidity value of buffer assets due to market value movements or changes in the haircuts applied by central banks. A simple comparison between stressed outflows and current liquidity value of the buffer assets is insufficient.

ix) Next to stress scenarios considering extreme, but plausible assumptions aimed at testing the survivability of the institution, also stress tests with less extreme assumptions are performed. These stress tests are aimed at testing the risk of undershooting the regulatory minimum requirements during times of less extreme (e.g. market wide, but not idiosyncratic) stress.

Section 10c: Behavioural assumptions Assessment criteria

i) In its stress tests, the institution considers various behavioural responses from other market participants to market stress. It also takes into account the extent to which a common response might amplify market movements and exacerbate market strain. In this connection the institution also considers the likely impact of its own behaviour on that of other market participants.

ii) The institution’s stress tests take into account how the behaviour of counterparties (or their correspondents and custodians) may affect the timing of cash flows, including on an intraday basis. Where the institution uses a correspondent or custodian to conduct settlement, it is expected to analyse the impact of those agents restricting their provision of intraday credit. The institution is also expected to understand the impact of a particular stress event on its customers’ use of intraday credit, and how those needs may affect its own liquidity position.

iii) The scenario design is subject to regular reviews to ensure that the nature and severity of the scenarios tested remain appropriate and relevant to the institution. These reviews take account of changes in market conditions, changes in the nature, size or complexity of the institution’s business model and activities, and actual experiences in stress situations.

iv) Stress test results are analysed as to their sensitivity to the most important assumptions.

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Section 10d: Utilisation of stress test results

Assessment criteria

i) Senior management reviews stress test scenarios and assumptions as well as their results. The reviews are recorded and made available to the supervisor. The choice of scenarios and related assumptions are well documented and are analysed together with the stress test results. The results, any vulnerabilities identified and any resulting actions are reported to and discussed with the Board of Directors, the Supervisory Board and the institution’s supervisors. Senior management should integrate the results of the stress testing process into the institution’s strategic planning process (for example the management could adjust its asset-liability composition) and the institution’s day-to-day risk management practices (e.g. through monitoring sensitive cash flows or reducing concentration limits). The results of the stress tests should also be explicitly considered in the setting of internal limits.

ii) Senior management decides how to incorporate the results of stress tests in the assessment of and planning around related potential funding shortfalls in the institution’s contingency funding plan.

iii) To the extent that projected funding shortfalls are larger than (or projected funding surpluses are smaller than) implied by the institution’s liquidity risk tolerance, senior management should consider in consultation with the Board of Directors whether to adjust its liquidity position or to bolster the institution’s contingency plan. The supervisor must be informed of this without delay.

iv) With respect to criteria i – iii above senior management distinguishes between scenarios of extreme stress and scenarios considering less extreme assumptions as described in 10b item ix and relates this to the risk appetite and contingency plans.

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I.11 The Contingency Funding Plan (CFP) (Recast Banking Directive, Annex V, point 22; BCBS principle 11) (See also Part II section 9 of this Manual) Principle A bank should have a formal contingency funding plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. A CFP should outline policies to manage a range of stress environments, establish clear lines of responsibility, include clear invocation and escalation procedures and be regularly tested and updated to ensure that it is operationally robust. Evaluation objective The supervisor will assess the adequacy of the CFP and how it relates to the institution’s risk profile, on both an individual and a group-wide basis. General note The institution must have a CFP that is commensurate with its complexity, risk profile, scope of operations and role in the financial system in which it operates. The design, plans and procedures of the CFP must be closely integrated with the institution’s ongoing analysis of liquidity risk and with the results of the scenarios and assumptions used in the stress tests. As such, the plan takes account of events over a broad range of different time horizons, including intraday. The assessment criteria for the CFP are elaborated on below, in relation to:

a) statement of plan, procedures, roles and responsibilities; b) communication plans; c) contents of the Contingency Funding Plan; d) testing, updating and maintenance.

Section 11a: Statement of plan, procedures, roles and responsibilities

Assessment criteria

i) The CFP ensures that the institution is prepared to withstand a range of scenarios of severe liquidity stress characterised by both institution-specific and more general market-wide stress, as well as the potential interaction between these.

ii) The plan includes a varied range of options to give management an overview of potentially available contingency measures.

iii) The time periods for which the various measures can be carried out is examined under various assumptions and stresses.

iv) The CFP contains clear policies and procedures that will enable the management to make timely, well-considered decisions, take contingency measures swiftly and proficiently, and communicate effectively to implement the plan efficiently. The CFP includes: ▪ a description of the various roles and responsibilities, including the authority to invoke

the CFP; a designated ‘crisis team’ for internal coordination and speedy decision-making during a liquidity crisis;

▪ the contact details and locations of members of the team responsible for implementing the CFP;

▪ deputies for key roles.

v) The CFP includes a clear decision-making process stating who is to do what at what time, and what issues need to be escalated to more senior levels within the institution.

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Section 11b: Communication plans

Assessment criteria

The institution ensures that:

i) the plan lays down in what situations and in what (timely, clear and consistent) way to communicate with internal and external parties such as business lines, creditors/deposit holders, shareholders, supervisors, central banks and system operators, in order to support general confidence in the institution;

ii) the plan also makes it clear when and how to communicate with correspondents, custodians, counterparties and customers, as the actions of these parties can significantly affect the institution’s liquidity position, depending on the underlying cause of a problem.

Section 11c: Content of the Contingency Funding Plan

Assessment criteria

i) In designing its CFP, the institution has paid attention to: ▪ the link between asset market and funding liquidity (e.g. the complete or partial loss of

the usual market funding options); ▪ the impact of stressed market conditions on its ability to sell or securitise assets; ▪ the fact that its own CFP may come into force just as other parties experience liquidity

scarcity; ▪ second-round and reputational effects related to the implementation of contingency

funding measures; ▪ the potential to transfer liquidity to other group entities, countries and business lines,

taking into account legal, regulatory, operational and time zone restrictions and constraints. These elements should reflect previous experience (of the institution itself or other institutions), expert judgment, market practice and insights gained by the institution from its own stress tests;

▪ the requirements and procedures relating to obtaining both regular (standing) facilities and possible ELA support from relevant central banks.

ii) In the context of the CFP and stress scenarios, the relevant personnel at the institution are aware of the operational procedures for transferring liquidity and collateral across different entities and systems and of the restrictions governing such transfers. The institution ensures that realistic timelines for such transfers are incorporated into the liquidity risk models, and that assets intended to be pledged as collateral in the event that contingency funding sources are utilised must be within a legal entity and at a location consistent with the management’s funding plans.

iii) The CFP (as well as the day-to-day liquidity risk management) reflects the central bank’s lending/repo programmes and collateral requirements, including facilities forming part of normal liquidity management operations. Here the nature of the lending facilities, the assets acceptable as collateral, the operational procedures to access central bank funds and the potential reputational issues involved in accessing these are taken into consideration.

iv) The CFP also includes potential measures to carry out critical payments on an intraday basis (see also I.7). In connection with situations where intraday liquidity resources become scarce, the institution is in a position to identify critical payments and to sequence

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or schedule payments based on priority. In the event of severe disruptions, the institution also has the ability to acquire additional sources of intraday liquidity, including by identifying and mobilising additional collateral. As with stress tests, the CFP also acknowledges that time-critical payment obligations can arise not only from the institution’s own transactions, but also those of its customers, and from its provision of services to payment and settlement systems (e.g. as a contingency liquidity provider). The CFP takes into account the risk management procedures of all relevant systems and is therefore capable of withstanding simultaneous disruptions in multiple payment and settlement systems.

v) The CFP distinguishes actions in specific currencies and geographical areas that are relevant for the institution or a CFP is available for each significant area / currency.

Section 11d: Testing, updating and maintenance

Assessment criteria

i) The CFP is regularly evaluated and tested to ensure its effectiveness and operational feasibility. Fundamental assumptions are periodically tested, such as the ability to sell, repo or borrow against certain assets or to actually draw down committed credit lines. Any failings are identified and lead to appropriate adjustments. The senior management updates the CFP at least once a year and submits the updated version to the Board of Directors, or more often as business activities or market circumstances change. Key aspects of the tests of effectiveness and operational feasibility relate to checking whether office-holders have the appropriate roles and responsibilities and are aware of these, checking whether contact details are up to date, proving the transferability of cash and collateral and checking the legal and operational documentation needed to execute the plan at short notice.

ii) The CFP is consistent with the institution’s business continuity plans and comes into operation in situations where business continuity arrangements have been invoked. The institution ensures effective coordination between teams managing issues surrounding liquidity and business continuity. Liquidity crisis team members and their deputies have ready access to the CFP both at the office and off site. The CFP is kept at a central repository of the institution as well as at locations where it is readily available to those responsible in an emergency situation.

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I.12 Liquidity cushions (Recast Banking Directive, Annex V, point 18; BCBS principle 12) (See also Part II section 3 of this Manual) Principle A bank should maintain a cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios, including those that involve the loss or impairment of unsecured and typically available secured funding sources. There should be no legal, regulatory or operational impediment to using these assets to obtain funding. Evaluation objective The supervisor will assess whether the minimum liquidity cushion calculated by the institution is appropriate for its liquidity profile, having regard to the processing of the stress test results. General note The liquidity cushion should contain a well-considered core of funds and unencumbered highly liquid assets of high quality that will be accepted by central banks as collateral and that are also liquid in private markets under stressed business conditions. This core of highly liquid assets is focused on withstanding a relatively short period of stress. The other part of the liquidity cushion, focused on a longer period of stressed business conditions, may consist of a broader range of liquid assets to the extent that the institution can demonstrate that it is in a position to monetise these assets within the specified time period. The liquidity cushion satisfies DNB’s minimum quantitative requirements, in terms of both size and composition. If the institution is exposed to specific liquidity risks which are inadequately expressed in the weighting percentages set by the supervisor, the institution takes this into account in the internal decision on the minimum size of the liquidity cushion. Assessment criteria

i) The level, composition and distribution of the liquidity cushion are commensurate with the current and possible future liquidity needs in various currencies, under normal and stressed business conditions. The estimates of liquidity needs take into account among other things both contractual and non-contractual cash flows, including the possibility of funds being withdrawn, perhaps early, and assume the inability to obtain unsecured funding as well as the complete or partial loss of access to funding secured by assets, particularly where these are not the safest, most liquid assets.

ii) The level, composition and distribution of the liquidity cushion are commensurate with the institution’s risk tolerance. As part of the liquidity cushion the institution holds a ample core of highly liquid assets to guard against the most severe stress scenarios with a relatively short time horizon. Highly liquid assets in this context means cash, freely available claims against central banks and unencumbered high-quality government bonds and other comparable instruments in terms of liquidity and receivables status/credit quality. The core of highly liquid assets can be supplemented with unencumbered assets that can be sold or turned into cash via repo transactions in less severe, more prolonged periods of stress. The liquidity of assets is generally assessed on the basis of the risk characteristics and transparency of the assets, acceptability as collateral to central banks (as an additional criterion; in itself this does not give a guarantee of ready market liquidity), the depth of the market for the asset (including the holdings of the institution relative to normal market turnover), and the name and presence of the institution in the relevant markets.

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iii) The assets maintained as a cushion are not susceptible to legal, regulatory or operational impediments and are available at all times to meet liquidity needs as they arise, and in that connection the location and size of the liquidity cushion within the group adequately reflects the structure and activities of the group.

iv) The institution is able and prepared to use these assets in the event of serious stress and the liquidity cushion is seen primarily as a safety net and not as a first line of defence.

v) The institution is realistic about the amount of cash it can borrow from the central bank against eligible assets and takes into account that the central bank may change the amount of liquidity it will provide or the terms on which it does so.

vi) The institution only includes in the liquidity cushion freely available, voluntarily maintained reserves with the central bank, and does not include any reserves the use of which would mean that the minimum required monetary cash reserve (possibly an average amount) could no longer be complied with in the relevant period of stress.

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I.13 Public disclosure (Recast Banking Directive, Annex XI; BCBS principle 13) Principle A bank should publicly disclose information on a regular basis that enables market participants to make an informed judgement about the soundness of its liquidity risk management framework and liquidity position. Evaluation objective The supervisor will assess whether the information made public by the institution (Pillar 3) in relation to the control of liquidity risk is suitable in view of the institution’s position in the financial system and its risk profile. General note The institution will ensure the transparency of its business processes focused on liquidity risk management and the division of the relevant tasks, powers and responsibilities (governance) and the role of the independent audit function, the compliance function and the risk management function, to enable stakeholders to make a judgement about the ability of the institution to meet its liquidity needs. Assessment criteria i) The degree to which the institution gives an insight into:

▪ the role and responsibilities of the relevant committees, as well as those of the different functional and business lines;

▪ the working of the liquidity risk management framework and the degree of centralisation or decentralisation of the treasury function and liquidity risk management. The structure may be described here in relation to the institution’s funding, limit setting systems, and intra-group lending strategies. Insofar as the treasury and risk management functions are centralised, the interaction between the group’s units can be described. The objectives for the separate group entities or business units in the organisation can also be made clear, for example the extent to which they are expected to manage their own liquidity risk.

ii) The degree to which the institution uses examples of quantitative information already disclosed by some institutions. Examples of this include information on the relative size and composition of the liquidity cushion, additional collateral requirements resulting from a credit rating downgrade, the values of internal ratios and certain key metrics that management monitors (including regulatory metrics disclosed in local jurisdictions) and the limits that are placed on the values of those metrics. Balance sheet and off-balance sheet items can also be examined, broken down into a number of short-term maturity bands and the resulting cumulative liquidity gaps.

iii) The qualitative discussion around the metrics must enable market participants to understand the significance of these metrics, e.g. the time span covered, whether the metrics were computed under normal or stressed conditions, the organisational level to which the metrics apply (group, banking or non-bank subsidiary), and other assumptions used in determining the liquidity position, liquidity risk and liquidity cushion.

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iv) As part of its regular financial reporting and publications, the institution is expected to ensure that it provides information with text and explanatory notes on its liquidity position enabling stakeholders to form a view of the institution’s liquidity profile and liquidity position. The qualitative information that the institution can disclose, besides the available quantitative information, includes: ▪ the types of liquidity risk to which the institution is exposed and which it monitors; ▪ the diversification of the institution’s funding sources; ▪ other techniques used to mitigate liquidity risk; ▪ the principles used by the institution in measuring its liquidity position and liquidity

risk, including metrics on which the institution is not disclosing data; ▪ an explanation of how market liquidity risk is reflected in the framework used for

managing funding liquidity; ▪ an explanation of how stress testing is used; ▪ a description of the stress testing scenarios modelled; ▪ an outline of the institution’s contingency funding plans, the organisational level at

which it is applied and an indication of how the plan relates to stress testing; ▪ the policy on maintaining liquidity reserves; ▪ regulatory restrictions on the transfer of liquidity among group companies; ▪ the frequency and nature of the internal liquidity reporting, including the framework

for increasing frequency in times of market stress.

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II Quantitative elements of the ILAAP Introduction These explanatory notes show the supervisor how an institution can demonstrate quantitatively – by reference to amounts, ratios and changes in them – that it complies with the EBA and BCBS principles for adequate management of the liquidity risk. Nonetheless, an institution is free to demonstrate its compliance, to the satisfaction of the supervisor and in accordance with the proportionality principle, in a manner other than described in these explanatory notes. The lists contained in this manual are not intended to be exhaustive; the manual serves as an initial guide for the assessment of the ILAAP. In the case of specific issues that require further elaboration, the supervisor may consult the text of the BCBS and EBA principles, on which this manual is based. The following subjects are considered below:

II.1 Limits and liquidity risk tolerance (risk appetite) II.2 Liquidity mismatch and maturity calendars II.3 Liquidity cushion: level and composition II.4 Statutory minimum ratios: DNB tests, LCR and NSFR II.5 Stress testing II.6 Early warning indicators II.7 Fund transfer pricing: liquidity costs, benefits and risk allocation II.8 Funding plan II.9 Contingency funding plan (CFP)

II.10 Use of central bank facilities II.11 Other relevant data

When quantifying the liquidity position, the institution should indicate whether the quantification has been carried out on a solo basis or on a group-wide (sub-consolidated or consolidated) basis. The institution should ensure that the calculation and the presentation of the data are accompanied by the explanatory notes needed by the supervisor in order to assess the adequacy of the institution’s liquidity position.

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II.1 Limits and Liquidity risk tolerance (risk appetite) (Annex V to the revised Banking Directive, points 14a and 18) (See also Part I section 2 of this Manual) Rationale The formulation, setting and monitoring of limits by the institution is an essential element of the management of the liquidity risk. The use of limits avoids the possibility that business lines are exposed to risks that are not acceptable to the institution as a whole. The limits applied reflect the institution’s risk tolerance. Evaluation objective Under this policy rule the supervisor assesses whether the system of limits put in place by the institution is adequate in the light of the liquidity risks that the institution is prepared to run and the institution’s changing liquidity under normal and stressed business conditions. Assessment criteria Depending on the nature and complexity of the institution, the quantitative standards that are relevant to the institution and that it imposes upon itself may contain limits relating to:

i) the contractual (both cumulative and non-cumulative) liquidity-related5 maturity mismatch in all separate, significant currencies;6

ii) the minimum survival periods for all convertible currencies together and in all significant currencies separately; for this purpose it should be clearly indicated what liquid assets are taken into account in this connection and what assumptions are made in respect of the possibilities for rolling over the various funding lines such as wholesale and retail funding;

iii) the level, composition and distribution among group entities of liquid and highly liquid assets and the relationship with limits and outflows per group entity;

iv) the off-balance sheet items;

v) the liquidity-related consequences of market risks, foreign exchange risks and interest rate risks;

vi) the minimum (liquidity) surplus to be held in the form of liquid assets for the liquidity of the weekly and monthly period on the basis of the 2011 Liquidity Regulation under the Wft (Regeling Liquiditeit Wft) and any other liquidity standards applied by the institution or standards applied by rating agencies;

vii) the composition and distribution of the funding according to the type of instrument, counterparty, maturity, currency or geographical area, taking into account potential ringfencing as well7; examples are limits relating to indicators such as the wholesale funding ratio, funding concentrations in respect of counterparties, instruments, products or currencies8 and the core funding ratio;9

5 The liquidity-related maturity is the entire maturity of the contract; this may differ from the interest-related maturity of a contract. 6 A currency may be significant if there are restrictions on the conversion or if the aggregate liabilities denominated in it amount to 5% or more of the institution’s total liabilities. See also BCBS, Dec 2010 par. 158. 7 If restrictions of a statutory or other nature prevent the transfer of resources within the group. 8 See, for example, BCBS, International framework for liquidity risk measurement, standards and monitoring, III Monitoring tools, III.2 Concentration of funding. 9 For a description of these indicators see CEBS Liquidity Identity Card, June 2009

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viii) the ratio of secured to unsecured funding;

ix) the use of central bank facilities;

x) the ratios of specified assets to liabilities, such as the loan-to-deposit ratio and the long-term-funding ratio;10

xi) the lending by the group, with a distinction being made between funds lent outside the group or institution and intra-group loans; in the case of intra-group loans a distinction is made by reference to business lines and Dutch or foreign group units;

xii) the level and distribution of the cushions to be maintained for fund transfer and securities clearing and settlement systems, specifically to limit the intraday liquidity risk.

10 See CEBS Liquidity Identity Card, June 2009

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II.2 Liquidity mismatch and maturity calendars (Annex V to the revised Banking Directive, points 14 and 20) (See also Part I section 5 of this Manual) Rationale Liquidity maturity calendars – unlike interest maturity calendars – provide information about liquidity-related maturities of assets and liabilities. They also provide information about the level of the liquidity shortfalls or surpluses for various time horizons. A distinction should be made between data that are fixed contractually and data that are based on observed behaviour, forecasts and planning. Evaluation objective The supervisor assesses whether the liquidity cushions are sufficient in relation to the contractual maturity calendars and the foreseen or planned liquidity developments. Assessment criteria i) The maturity calendar should show the incoming and outgoing cash flows connected

with the calendar items and the liquidity shortfalls or surpluses (mismatches) derived from them for each time horizon. The total, cumulative mismatch is the aggregate of all mismatches over all time horizons.

ii) On the basis of the available liquid assets (a cumulative net surplus) and their

contractual data, it is possible to calculate the cushion capacity or so-called counterbalancing capacity of these assets and the survival period of the institution (in days, weeks or months) in the maturity calendar for all currencies together and for each significant currency separately.11 Conversely, on the basis of a (cumulative) shortfall for a certain period, the liquidity cushion required for the period can be determined in order ultimately to reach a baseline position or positive balance for that period. By applying behavioural assumptions about the extension of the various asset and liability items, the supervisor can gauge the approximate future liquidity development of the institution in both business-as-usual and stressed conditions.

iii) Information on a daily basis over a period of 1-3 months is necessary for good liquidity

management, specifically in the case of funding types that are sensitive to credit risk. For horizons longer than three months, aggregation in the form of monthly buckets or annual buckets (from 12 months) is sufficient. The granularity of the maturity calendars (for example as regards the categories and subcategories applied) should be in keeping with the specific characteristics of the institution. Without prejudice to the principles described above, the maturity ladder reporting framework drawn up by the EBA can be used as a source of inspiration.

11 For an example, see the template of the maturity ladder reporting framework of the EBA Liquidity Task Force. At the date of the compilation of this supervision manual, this maturity ladder is still in the drafting stage. It is expected that the ladder can be consulted from the summer of 2011 onwards.

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iv) All contractual data should be shown in relation to the applicable time horizons. In the case of options the first possible exercise date should be shown for secured funding.12 For the purposes of good liquidity management, non-contractual data should, wherever possible, be presented in the first year in the same time horizon categories as used for contractual data. When presenting data for more distant time horizons, the institution can confine itself to presenting data based, for example, on a completed budgeting process or approved funding plan.

Depending on its nature and complexity, the institution should have:

v) A maturity calendar showing the different time horizons and classification of outflows and inflows and the counterbalancing capacity of liquid assets. The institution should explain how it has subdivided categories and time horizons.

vi) Data concerning classified contractual and expected liquidity flows for the purposes of projecting liquidity developments can be based on behavioural assumptions applied by the institution in normal conditions (business-as-usual). As regards strategic developments, the institution can base itself on data from the ordinary budgeting process and the related funding plan.

vii) The reasoning underpinning the behavioural assumptions, if possible on the basis of historical data series.

viii) Maturity calendars in all significant currencies.

ix) Survival periods for each significant currency on the basis of available (existing) liquidity, on the assumption that wholesale funding will not be rolled over (this gives the survival period on the basis of the wholesale runoff).

x) Survival periods for each significant currency on the basis of available liquidity, on the assumption that wholesale funding13 will not be rolled over and that there will be a given percentage of withdrawals from committed retail funds (this gives the overall survival period per currency).

xi) The counterbalancing capacity of the liquid assets over time, taking account of the maturity and any encumbrance of these assets.

12 An example is multi-year funding with a put option for the investor after one or more months. 13 Wholesale funding comes from non-natural persons and can be divided into various types; see section II-5c re A: Wholesale funding risk.

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II.3 Liquidity cushion: level and composition (Annex V to the revised Banking Directive, points 14, 16 and 17) (See also Part I sections 9 and 12 of this Manual) Rationale The purpose of an institution’s liquidity cushion is to prevent mismatches between the cash inflow and outflow of the institution as a consequence of both foreseen and unforeseen circumstances. By using its strategies and procedures for the management of the liquidity risk the institution ensures that the level, composition and distribution of the liquidity cushion are in keeping with the level and nature of its current and possibly future liquidity needs. Evaluation objective The supervisor assesses whether the level, composition and distribution among the group entities of the liquid, highly liquid and unencumbered assets of the institution are adequate. Assessment criteria Depending on the nature and complexity of the institution, the ILAAP provides information about:

i) The level and composition of the stock of liquidity in accordance with the 2011 Liquidity Regulation under the Wft (these are the recognised liquid assets, excluding the inflow from the maturity calendar). The institution should show:

▪ the market value of asset items taken into account under this Regulation and the related weighting factors (haircuts);

▪ the physical location in which these assets are kept;

▪ the currencies in which these assets are denominated;

▪ the percentages of the total asset items formed by the various asset items distinguished by type (or category);

▪ the period during which the relevant (possibly borrowed or by collateral-swap received) collateral will be available unencumbered to the institution;

▪ restrictions of a legal, regulatory, geographical, operational or other nature that would make liquidation impossible or possible only to a limited extent or after delay; the institution should estimate the amounts which, as a result, cannot be liquidated or can be liquidated only to a limited extent;

▪ the level of the official standby facilities allocated to the institution.

ii) The level and composition of the available unencumbered liquid assets on the basis of level I and level II criteria of the Liquidity Coverage Ratio (see BCBS, International framework for liquidity risk measurement, standards and monitoring, December 2010). This means that the institution has information about the first six criteria referred to in point (i), applied to the assets classified as level I and level II.

iii) The level and composition of the total collateral that is eligible for central bank borrowing in the context of standard facilities. This means that information is available about the first six criteria as described in point (i) above, specifically in relation to the collateral that has been accepted as such by the ECB or by another recognised central bank specified by the institution, and that it is known to what part of the collateral pool it has been assigned at that central bank.

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iv) Any encumbered part of the collateral together with the period when the collateral will become unencumbered.14

v) The level, composition and distribution among group entities of the assets kept by the institution as a (minimum) liquidity cushion (on the basis of the liquidity value or the value after the application of haircuts to the market value) in order to be able to meet the minimum survival period(s) applied by the institution or other internal objectives.

vi) Concentrations of collateral, classified by type and counterparty/issuer.

14 Since it may not always be clear in relation to the collateral pool of an institution at the ECB exactly what assets are encumbered, it is sufficient to state percentages. For the purposes of the LCR monitoring, institutions may assume that the assets with the lowest liquidity value (not being level 1 or level 2 collateral) are the first to be encumbered. These are followed successively by level 2 and level 1 assets of each.

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II.4 Statutory minimum ratios: DNB test, LCR and NSFR (2011 Liquidity Regulation under the Wft (See also Part 1 section 5 of this Manual) Rationale The minimum statutory required liquidity is an important criterion for institutions and supervisors alike. The outcome of the DNB liquidity test and any past and future changes in the outcome shed light on how the institution manages its liquidity risk. In Basel III: the 2010 international framework for liquidity risk measurement, standards and monitoring, the Basel Committee on Banking Supervision (BCBS) has imposed strict conditions on the quality and marketability of the assets to be included in the LCR cushion, and has introduced a liquidity standard in the form of the Net Stable Funding Ratio (NSFR) that has a longer test horizon. The LCR is expected to be introduced as a liquidity standard in the Netherlands from 2015. The NSFR is expected to be implemented in 2018. Evaluation objective The supervisor assesses the adequacy of the institution’s liquidity cushions and funding profile in the light of the current and future financial position of the institution and taking into account current and future liquidity standards. Assessment criteria

i) Under the 2011 Liquidity Regulation under the Wft, changes in the level of liquidity should be appropriate to the characteristics of the institution and there should be no evidence of risky trends. The assessment can be based on the changes from week to week and month to month over the six months prior to the date on which the institution supplied the data required for the evaluation (SREP) to DNB and on a projection of these data for the six months after that date. The institution can base its refinancing projection on business-as-usual market conditions and the institution’s refinancing plan.

ii) The outcome of the calculation of the current liquidity position on the basis of the LCR should be appropriate to the characteristics of the institution and the expectations of the relevant market participants regarding compliance (i.e. the degree of compliance) with the LCR. Use can be made for this purpose of the requested data as of the most recent period-end or the mid-period data on the basis of the QIS monitoring template or the future mandatory standard reporting for the LCR.

iii) The proposed migration path to compliance (i.e. the maintenance of compliance) with the LCR standard should be appropriate to the characteristics of the institution and take account of the expectations of the relevant market participants.

iv) The calculation of the liquidity position on the basis of the NSFR standard is appropriate to the characteristics of the institution and the expectations of the relevant market participants regarding compliance (i.e. the degree of compliance) with the NSFR. Use can be made for this purpose of the requested data at the end of the most recent period or midway through the period on the basis of the QIS monitoring template or the future mandatory standard reporting for the NSFR.

v) The proposed migration path to compliance (i.e. the maintenance of compliance) with the NSFR standard should be appropriate to the characteristics of the institution and take account of the expectations of the relevant market participants.

vi) Insight is obtained in how individual group entities and/or business lines contribute to the size and development of the regulatory minimum ratios.

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II.5 Stress Testing (Annex V to the revised Banking Directive, points 18, 19 and 20) (See also Part I sections 6, 8 and 10 of this Manual) Rationale Stress testing is an important instrument of liquidity risk management since it enables an institution to assess on the basis of different stress scenarios whether its liquidity would remain adequate in terms of level, composition and distribution in these scenarios. Based on the stress test results, the institution can gauge the possible liquidity risks that it runs and compare them with the defined risk tolerance. Evaluation objective The supervisor assesses, by reference to the stress test assumptions, stress test methods and stress test results, the adequacy of the institution’s liquidity position and the measures for managing its liquidity risk. Section 5a: ILAAP stress scenarios Rationale As regards the scenarios, a distinction can be made between normal conditions on the one hand and stressed conditions relevant to the institution on the other. The stressed conditions include institution-specific conditions, market-specific conditions and a combination of the two. The scenarios take into account historical data as well as hypotheses based on plausible assumptions relevant to the institution concerned. As an important part of the stress test programme, account is taken of simultaneous pressure in both funding and asset markets in a variety of market segments. Stress testing expressly takes into account reputational risk and the impact of trigger events, including a downgrading of the rating. Evaluation objective The supervisor assesses whether the scenarios applied by the institution are sufficiently extreme and are specifically geared to the characteristics of the institution. Assessment criteria Although the assumptions in the case of stress tests are dependent on the nature and complexity of the institution and may therefore differ from institution to institution, DNB may base its evaluation of the ILAAP on factors such as:

� Types of stress scenarios recognised by an institution. � Minimum duration and severity of the stress scenarios. � Consequences of the stress scenarios for an institution’s risk drivers.

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Types of stress scenarios to be recognised by an institution i) An institution should base its stress tests on scenarios that are sufficiently relevant,

detailed and extreme for its business. These may include institution-specific scenarios, market-wide scenarios and scenarios that are a combination of the two. Institutions elaborate these different scenarios and also make use of reverse stress testing. Reverse stress testing can be used, for example, to determine what degree of stress would result in the internal objectives not being achieved.

ii) The institution applies both scenarios of extreme stress (for example, to determine survival periods) and of less extreme stress (for example, to help gauge the funding plan’s feasibility or to test the compliance with internal targets or minimum requirements during periods of market turmoil).

iii) Institutions should keep a written record of special factors and assumptions made in respect of the various stress scenarios, the expected or planned changes in their balance sheet items and the results of these scenarios.

Minimum duration and severity of the stress scenarios iv) Unless special circumstances necessitate different assumptions, the stress tests should be

developed on the basis that the following elements are necessary in order to obtain sufficient information about the adequacy of the liquidity positions and controls: � the duration of the total stress period should be three months or longer; � unsecured wholesale funding is not rolled over for three months; � retail deposit outflow doubles or rises to at least 20% of the original retail volume

during the first month of the institution-specific stress period; � 50% drawdown of contingent obligations (excluding official standby facilities) during

the first three months; � the percentage increases of haircuts are realistic for the liquid assets or instruments

concerned in stressed conditions; � the market values of liquid assets fall until price levels are reached that are realistic for

them in stressed conditions; � FX markets close for the first two weeks; � 2-notch rating downgrades within the first three months.

The scenario based on the elements described above is different and longer than the liquidity test under the 2011 Liquidity Regulation under the Wft. The institution can itself estimate the possibility of obtaining liquidity on the basis of assets that are not recognised by the supervisor as highly liquid. The institution can apply not only a very extreme scenario but also milder scenarios in which only highly liquid assets are used as a cushion.

Consequences of the stress-scenarios for an institution’s risk drivers An institution’s risk drivers are the liquidity risk factors that are recognised by the institution and are of essential importance to the institution’s liquidity position and continuity in normal and stressed conditions. In this connection, the following risk drivers are recognised internationally (these are explained in more detail in section 5c):

A. Wholesale funding risk B. Retail funding risk C. Intraday liquidity risk D. Intra-group and intra-company liquidity risk E. Liquidity risk of marketable assets F. Liquidity risk of non-marketable assets G. Funding concentration risk and market access H. Liquidity risk connected with off-balance-sheet items

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I. Liquidity risk related to the institution’s reputational risk, business model and strategy J. Currency liquidity risk

v) As regards the development of the risk drivers in normal conditions (business-as-usual),

an institution should be aware of the extent to which the liquidity position is sensitive to the different risk drivers (and changes in them) from month to month over a period of six months after the reporting date on which the institution has supplied DNB with the data required for the DNB evaluation.

vi) As regards the development of the risk drivers in the various stress scenarios, the

institution should be aware of the extent to which the liquidity position is sensitive to the different risk drivers (and changes in them) from month to month over a period of at least three months after the reporting date on which the institution has supplied DNB with the data required for the DNB evaluation. The institution should apply stressed conditions that relate to institution-specific conditions, market-wide conditions and a combination of the two.

vii) On the basis of the results of the stress tests the institution should assess the adequacy of

the risk-driver-related assumptions made by it beforehand in respect of: � correlations between market, funding and credit risk; � the funding diversification; � restrictions in respect of the actual availability of assets; � the margin calls applied and/or additional collateral required; � the impact on the liquidity position of meeting contingent liabilities; � the access to open market operations and/or other liquidity facilities; � balance sheet developments; � the behavioural assumptions in respect of market access to and the possibilities for

rolling over encumbered and unencumbered funding sources (withdrawal percentages or (net) growth per funding source per period);

� the operation of foreign exchange markets in which the institution is active; � the operation of funds transfer and securities clearing and settlement systems on which

the institution is dependent; � other assumptions used by the institution.

viii) As regards the development of the risk drivers in relation to the risk limits formulated

for them, the institution should have information about: � the manner in which the risk drivers develop in relation to the risk limits fixed by the

institution in both normal and stressed conditions; the institution should take into account in this connection the correlated effects on its assets and liabilities, including second-round effects as a consequence of market-wide and institution-specific developments;

� the manner in which the scenario outcomes are translated into policy consequences for liquidity risk management;

� whether and, if so, to what extent provision should be made for additional risk mitigation by the institution;

� what measures from the contingency funding plan or possible adjustments to the plan are necessary.

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Section 5b: Use of stress test results Rationale The value of the stress tests for the quality of the risk management is highly dependent on the manner in which the institution deals with the outcome of the stress tests. This has already been dealt with in part 1 of this manual. Evaluation objective The supervisor assesses whether the stress test results are used within the institution for timely identification of risks and timely mitigation of risks that are unacceptable for the institution. Assessment criteria The institution should use the results of stress tests to:

i) Determine whether measures are necessary to bring or maintain the current position, either now or in the future, within the risk tolerance standards; if this is the case, it should be clearly indicated what measures should be taken, what their scope should be, when they should be taken and on what success factors they are dependent.

ii) Assess the feasibility of the funding plan and identify any vulnerabilities; it should be possible on this basis, for example, to adjust the funding plan or the timing of its implementation.

iii) Assess the feasibility of the contingency funding plan and the extent to which the assumptions made in respect of the timing of the measures and the resulting liquidity benefits are realistic.

iv) Inform the senior management, including the board of directors and supervisory board, about the risks that the institution runs.

v) Indicate, when implementing its ILAAP stress test, to what extent the measures announced in its previous ILAAP have been implemented.

Section 5c: Explanatory notes on risk drivers A: Wholesale funding risk (Annex V to the revised Banking Directive, point 18) Rationale Wholesale funding comes from non-natural persons and is a funding source that is subject to withdrawal to a much greater extent than funding from other sources, particularly in stressed conditions. Wholesale funding can be subdivided into categories, depending on the extent to which it can be withdrawn. Evaluation objective The supervisor assesses on the basis of the relevant data the extent to which the institution is reliant on (volatile) wholesale funding and the manner in which the resulting risks are controlled. For this purpose the supervisor compares the reliance on wholesale funding with the liquidity cushions and other contingency measures.

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Assessment criteria i) The institution should distinguish between the various types of wholesale funding on the

basis of historically observed withdrawal percentages and/or on the basis of its expectations about the level of these percentages during the occurrence of the scenarios formulated by the institution.

ii) Depending on its nature and complexity, an institution can distinguish between the following categories of wholesale funding:15 � unsecured wholesale funding provided by small business customers, up to an amount

of €1 million per business;16 � unsecured wholesale funding provided by business customers that have not only a

creditor relationship with the institution concerned but also another operational relationship with it;17

� unsecured wholesale funding provided by non-financial institutions, sovereign, regional and local authorities and public utilities;18

� unsecured wholesale funding provided in the form of unsecured certificates of deposit, medium term notes, floating rate notes or commercial paper;

� unsecured wholesale funding provided by legal entities that are sensitive to the creditworthiness of the institution concerned, including banks, pension funds and money market funds;19

� secured wholesale funding in respect of which the institution has indicated that it uses or may use the liabilities as a secured source of funding, and to what extent it envisages that this funding could be continued in the different stress scenarios; in this connection, the institution formulates the rollover percentages of these funding sources on the basis of the quality of the collateral.20

iii) In addition, the institution should be aware of major changes in: � the total amount of the institution’s wholesale funding; � the total amount of (unsecured) wholesale funding for less than one year; � the total amount of wholesale funding divided into subcategories; � the subdivision of secured wholesale funding into OTC, CCP and triparty.

iv) In addition, the institution should have information about changes in the following ratios: � wholesale funding per subcategory / total wholesale funding; � wholesale funding / total debt of the institution; � wholesale funding for more than 1 year / total wholesale funding; � unsecured wholesale funding for less than 1 year / total wholesale funding; � directly callable or overnight wholesale funding (including wholesale funding callable

subject to a penalty clause) / total wholesale funding; � secured wholesale funding / total wholesale funding; � secured wholesale funding based on highly liquid assets in accordance with the LCR

criteria for Level 1 and Level 2 assets / total wholesale funding21; � triparty wholesale funding / total wholesale funding.

15 Partly in accordance with the LCR definitions; see the categories described in BCBS 188, paragraphs 69 - 70. 16 Cf. BCBS 188, paragraphs 69 and 70; the withdrawal percentages are between 5% and 10% a month for stable retail funding and a minimum of 10% a month for less stable retail funding. The institution is expected to provide an estimate of the withdrawal risk based on its own experience and on estimates appropriate to the risk tolerance of the institution. 17 Cf. BCBS 188, paragraphs 72-77. 18 Cf. BCBS 188, paragraph 81. 19 This may also include fiduciary deposits obtained from or through banks. 20 Cf. the categories described in BCBS 188, paragraph 87. 21 Cf. BCBS 188 paragraphs 40 (c), (d) and (e) Level 1 assets and paragraphs 41 and 42 for Level 2 assets and also for the characteristics of high-quality liquid assets as shown at paragraph 22 (a) and (b).

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Application of the stress scenarios shows how wholesale funding has developed within the institution as a total amount and as an amount per subcategory. B: Retail funding risk (Annex V to the revised Banking Directive, point 18) Rationale Retail funding is funding that comes from natural persons (variable savings, savings and other deposits and current accounts). The liquidity need connected with changes in the available retail funding is mainly based on behavioural assumptions. In comparison with wholesale funding, retail funding generally tends to have greater stickiness22 and hence will be more stable. The extent to which this is the case depends on the type of customer and the relationship between the customer and the institution. Evaluation objective The supervisor assesses the stability of the various types of retail funding recognised by the institution and their treatment in the stress tests. The supervisor compares the reliance on retail funding (above all non-stable retail funding) with the liquidity cushions and other contingency measures and assesses whether the risks are adequately controlled. Assessment criteria i) As part of its measures to manage the liquidity risk, the institution should make

appropriate use of the balances of and changes in: � the total amount of retail funding; � the amount of stable retail funding23 and its percentage share in total retail funding; the

institution should determine what percentages apply to each type of stable retail funding in each of the stress scenarios;

� the amount of the retail funds fully covered by a deposit guarantee scheme; � the amount of non-stable retail funding24 and its percentage share of total retail

funding; the institution should determine what percentages apply to each type of non-stable retail funding in each of the stress scenarios;

� the amount of savings funds consisting of internet savings of mono customers not covered by deposit guarantee systems.

ii) In addition, the institution can take into account changes in the following ratios:

� the ratio of retail funding to total funding; � the amount and percentage of directly callable retail funding or retail funding callable

subject to a penalty clause in relation to total retail funding and the total funding of the institution;

� the percentage of term retail funding that is not callable subject to a penalty clause in relation to the total retail funding and total funding.

iii) Application of the stress scenarios should show how retail funding has developed within

the institution as a total amount and as an amount per subcategory. Estimates should be available for the monthly withdrawals for retail funding as a whole and retail funding per subcategory.

22 In this context, stickiness means the extent to which this funding – and hence the withdrawal of this funding – is sensitive to the institution’s creditworthiness. 23 See, for example, BCBS 188, paragraphs 54-56. 24 See, for example, BCBS 188, paragraph 57 et seq.

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C: Intraday liquidity risk (Annex V to the revised Banking Directive, point 14) Rationale An institution should have information about the extent to which it should hold payment capacity or collateral for the various payment and securities settlement systems. For this purpose the institution needs information about the size and timing of the variations in the payment and collateral capacity required. The institution should take into account the usual fluctuations in normal business conditions, for example as a consequence of seasonal patterns, as well as of fluctuations that can occur in stressed conditions. The payment capacity is determined by the collateral and backup facilities earmarked for this purpose. Evaluation objective The supervisor assesses the intraday liquidity risk connected with the manner in which the payment and securities settlement systems are organised, the manner in which this is managed by the institution and the cushions established to mitigate this risk. Assessment criteria As part of its measures to manage the liquidity risk the institution should make appropriate allowance for:

i) The daily gross incoming and outgoing cash flows separately for each payment and settlement system in which the institution participates.

ii) The normal pattern of incoming and outgoing payments flows and the cumulative net intraday difference between these flows; the institution determines the maximum net cumulative intraday liquidity position during a period appropriate to the institution, taking into consideration all payment and securities settlements systems used by it.

iii) The amount and composition of collateral required in normal business conditions in order to meet in good time all obligations resulting from the participation of the institution in the various payment and securities settlement systems (amount per location and per period).

iv) The extra intraday liquidity required in stressed conditions as a consequence of the failure or partial failure of an important counterparty or associated group of counterparties to perform (substantial) payment obligations.

v) The effects that a decline in the value of the collateral in stressed conditions may be expected to have for payments and securities settlements.

vi) The average daily collateral value freely available to respond to unexpected movements in daily payment and settlement transactions.

vii) The total of the daily intraday time-critical payment obligations per timeframe of all payment and settlement systems used by the institution; for this purpose the institution may use an observation timeframe that is suitable for its business (e.g. a three-month period).

viii) The number and total value of late payments and settlements in each suitable observation timeframe (e.g. a three-month period).

ix) The paid-up margin requirements in respect of the institution’s own positions in the form of cash or unencumbered collateral for both OTC and listed transactions, on a solo basis as well as group-wide.

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x) Contingent obligations taken into account by the institution in connection with the intraday liquidity risk.

xi) Maximum distinction between the payment capacity it needs for payment and settlement transactions for its own account and the capacity it needs for transactions on behalf of its customers (including correspondent banks).

xii) The minimum timeframe (for operational and regulatory reasons) that it needs in order to transfer extra payment capacity to its payment systems.

xiii) The relevant cut-off times and emergency procedures in relation to payment and settlement systems used by the institution.

xiv) The back-up facilities in both business-as-usual and stressed conditions, together with a specification of the scope, timeframe within which and conditions on which the facilities can be made available.

xv) The scope of the committed and non-committed credit lines available to the institution in order to receive payment capacity.

xvi) The scope of the committed and non-committed intraday credit lines that the institution has provided to other parties for the purposes of intraday credit.

xvii) The costs incurred in obtaining intraday collateral or credit, both from the institution itself and from external sources.

xviii) The relationship between the collateral intended for facilitating daily payment and securities transactions and the (treasury) limits for overnight positions in currencies significant to the institution.

D: Intra-group and intra-company liquidity risk (Annex V to be revised Banking Directive, points 14, 17 and 18) Rationale An institution should take account of amounts borrowed and lent within the group.25 As stressed conditions may occur simultaneously in the different group entities, they may need to recall loans and to renew amounts already withdrawn or withdraw additional funds. In addition, repayment of intra-group or intra-company funds abroad may be limited by national supervisors or government authorities. Evaluation objective The supervisor assesses the manner in which the institution manages the risks resulting from the mismatch between assets and liabilities among group entities. The supervisor assesses whether the existing intra-group and intra-company relationships are appropriate to the institution. Assessment criteria In its ILAAP the institution describes the characteristics of the following aspects, including an assessment of the potential liquidity risks:

i) The group and business lines structure of all consolidated and non-consolidated group entities in the Netherlands and abroad, together with a statement of the total assets and liabilities of each group entity.

25 Intra-group relationships are the financial relationships between independent and non-independent entities in the Netherlands and abroad. Intra-company relationships are the financial relationships between departments in different countries of the same legal entity.

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ii) The market access to funding sources in currencies relevant to the institution on the basis of credit limits confirmed by external parties for group entities, together with a specification of amounts and maturities.

iii) The extent to which group entities have access to central bank facilities (together with a specification of the amounts per currency and of the available collateral and the central bank haircuts that are applied).

iv) The legal, regulatory, geographical or operational restrictions that may exist in relation to intra-group / intra-company lending and borrowing.

v) The (internal) liquidity limits for and exposures to group entities, both as a total and for each separate entity, including maturities.

vi) The existing intra-group / intra-company relationships on the reporting date (loans and deposits, together with a specification of the currencies, amounts and maturities, and the names of the entities and business lines).

vii) The average of the amounts lent to or borrowed from group entities, together with outliers, during the last 12 months (seasonal patterns).

viii) Overview of deposits and loans of group entities with external parties (currencies, gross amounts, maturities, names of the counterparties, balance for each counterparty, and the total amount lent or borrowed for each group entity).

ix) The liquidity positions and developments in those positions of business lines and group entities, both home and abroad, based on regulatory minimum ratios.

x) The maximum liquidity requirement or liquidity contribution that can be expected of the group entities and/or business lines in the stress scenarios formulated by the institution.

E: Liquidity risk of marketable assets (Annex V to the revised Banking Directive, points 16 and 17) Rationale The purpose of the liquidity cushion is to enable the institution to meet liquidity needs as a consequence of foreseen and unforeseen circumstances. The level and composition of the cushion determine to what extent the institution can weather predefined survival periods through the sale of assets from this cushion or repo transactions without undermining the continuity, business model or strategy of the institution. The cushion consists of highly liquid assets that can be used in the market to obtain liquidity even in times of market disruption. Evaluation objective The supervisor assesses the quality of the liquidity cushion and the feasibility of the liquidity value assigned by the institution to its marketable assets for the purposes of internal use (incl. stress tests). Assessment criteria The institution uses prudent estimates of both the liquidity value and the time required to liquidate buffer assets. Additional stress is applied relative to the actual liquidity value. The institution makes use of information on and (potential future) developments in:

i) The total market value of each type of collateral in all significant currencies.

ii) The central bank haircuts applicable to all types of collateral and the stability of these haircuts.

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iii) The physical location of collateral.

iv) The estimated time that a sale in normal market conditions will take.

v) The estimated time needed to convert the collateral into liquid assets (e.g. through repo transactions) and the expected value of the assets after conversion.

vi) A realistic estimate of the time needed for and expected proceeds of a forced sale of these assets in the stress scenarios chosen for the ILAAP, taking into account the following aspects: ▪ the size of the market in these assets; ▪ the level of the bid-offer spreads; ▪ the presence of market makers in the market in which these assets are traded; ▪ the complexity of the assets; ▪ the institution’s access to this market (traded volumes and transaction frequency); ▪ principles for valuing these assets.

vii) The size of the losses in the event of a forced sale of the liquid assets and how this would affect the solvency position.

viii) Any restrictions of a legal, regulatory, geographical, operational or other nature that would make liquidation impossible or possible only to a limited extent; the institution should estimate the amounts of the assets that cannot be liquidated as a consequence of these restrictions.

F: Liquidity risk of non-marketable assets (Annex V to the revised Banking Directive, points 16 and 17) Rationale Non-marketable assets provide no scope in the short term for obtaining liquidity through sale or collateralisation. Nonetheless, it is sometimes possible to convert certain types of assets into marketable financial instruments in the medium to long term. Examples include securitisation, warehousing, covered bond programmes or the private sale by private treaty f assets having a very low credit risk. Evaluation objective The supervisor assesses the liquidity value assigned by the institution to non-marketable assets and how this is dealt with by the institution, for example in the internal limits and stress tests. Assessment criteria Under the ILAAP the institution should provide information about:

i) The estimated amounts available to the institution in the form of assets not marketable in stressed conditions.

ii) How these assets can be converted into liquidity.

iii) The time the institution would need to obtain liquidity from these assets in both normal and stressed conditions.

iv) The amount of liquidity that the institution expects to generate through the liquidation of the relevant assets.

v) The costs and losses that would be incurred through the conversion of these assets into liquidity and how this would affect the solvency position.

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G: Funding concentration risk and market access (Annex V to the revised Banking Directive, point 18) Rationale The institution is responsible for diversification of the liquidity sources and for maintaining access to a range of markets in which liquidity can be obtained. If there is a concentration of specific funding sources, extra attention should be paid to the consequences of the unavailability of these sources. Evaluation objective The supervisor assesses the extent to which funding concentrations occur and how this is addressed by the institution, for example in the internal limits and stress tests. The supervisor also assesses the activity in the funding markets relevant to the institution. Assessment criteria i) In the context of the ILAAP, the institution should take into account funding

concentrations (in absolute amounts and expressed as a percentage of the total funding) and, in doing so, distinguish between: ▪ product; ▪ instrument; ▪ type of counterparty; ▪ secured and unsecured funding; ▪ currency; ▪ maturity; ▪ geographical location.

ii) As regards secured funding the institution should take into account funding concentrations

relating to: ▪ securities financing activities or other activities on the basis of secured funding;

examples are stock borrowing/lending and repos/reverse repos (the latter broken down into OTC, CCP and triparty);

▪ asset-backed commercial paper; ▪ covered bonds; ▪ securitisations of loans on the basis of credit cards and cars; ▪ securitisations of mortgages; ▪ open market operations.

iii) The institution should also take into account:

▪ its ten largest funding sources; ▪ the maturity structure of these ten largest funding sources; ▪ markets and market participants (intermediaries) that meet the funding needs of the

institution; ▪ expectations concerning withdrawals of funds forming part of the funding

concentrations and funding sources referred to here in normal and stressed conditions.

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H: Off-balance sheet items and related liquidity risk (Annex V to the revised Banking Directive, points 15 and 19) Rationale Activities that are not shown on the balance sheet may also increase the liquidity risk. This concerns both contractual and non-contractual commitments that could result in reputational damage in the event of non-performance. The institution calculates the possible liquidity needs as a consequence of these off-balance sheet activities and takes them into account in the stress scenarios and internal limits. Evaluation objective The supervisor assesses whether the institution makes sufficient allowance for the impact of market developments and the institution’s credit status on the risks of diverse off-balance sheet activities with a view to managing its present and future liquidity position. Assessment criteria The institution should have:

i) Up-to-date overviews of all contractual and non-contractual off-balance sheet instruments.

ii) Calculations of the liquidity flows that may be generated by these transactions or commitments in normal and stressed conditions; for this purpose, the following groups can serve as a guide:

▪ net payment obligations calculated for each counterparty on the basis of derivative positions; this concerns cash flows for interest payments, the termination or exercise of a contract, or cash flows and/or collateral flows connected with the revaluation of contracts (e.g. margin requirements in the form of cash or additional collateral); in the latter connection it is necessary in any event to check to what extent the institution’s credit rating is sensitive to the derivative contracts referred to here, what liquidity needs can arise as a consequence of differences in the valuation of existing collateral, increased volatility or a change in market prices (or in some other way as can be determined by collateral support annexes);

▪ amounts drawn down under committed credit and liquidity facilities and other conditional obligations unrelated to securitisation vehicles; these drawings concern permitted funding facilities (to both professional and non-professional counterparties), loans not yet drawn down or mortgages not yet deposited and, for example, credit card debit balances;

▪ liquidity facilities for the benefit of sponsored and/or third-party-structured securitisation programs (asset-backed securities, conduits and/or comparable financing vehicles); the institution should indicate the scope of the possible commitments, the situation in which it might be necessary to use the facilities and the expected impact on the liquidity of the institution.

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I: Liquidity risk related to the reputational risk, business model and strategy (Annex V to the revised Banking Directive, points 15, 19 and 22) Rationale The institution analyses the quantity of liquidity – both in total and for each funding source – that is required in order to prevent harm to the business model, strategy and reputation of the institution in stressed conditions. In addition, the institution shows what determinants of the business model (e.g. large repo activities with volatile profitability) can have a strong impact on the liquidity position. Evaluation objective The supervisor assesses to what extent the institution makes sufficient allowance for the restrictions that it can make in its business model and strategy without affecting its business model, strategy or reputation. The supervisor also assesses whether the institution makes sufficient allowance for activities that are of essential importance to the business model, but have or can have a major impact on the liquidity position. Assessment criteria The institution should provide information clarifying in both an absolute and a relative sense (with amounts and percentages) the following matters (together with an explanation of how this is dealt with in the management of the liquidity risk):

i) The approved internal liquidity limits for the separate business lines and/or group entities, together with a specification of the maturities for which lending can be arranged by the business lines and entities.

ii) The actual utilisation of the internal liquidity limits on the reporting date for each business line and/or each group entity; the institution should have overviews of the (gross) amounts outstanding and drawn down for each business line or group entity and the utilisation percentages of the allocated liquidity limits.

iii) The restrictions that could be imposed in respect of existing and new retail activities without customer relations being adversely affected; the institution should provide an estimate of the percentage growth restrictions or scope for reduction that it considers feasible and should estimate the extent of the reduced need for liquidity or the liquidity that would be released as a result.

iv) The restrictions that could be imposed in respect of existing and new wholesale activities without causing damage to future wholesale business (possible percentage reduction in these activities, together with an estimate of the extent of the liquidity released as a consequence of a reduction in the wholesale positions).

v) The restrictions that can reasonably be made in respect of the sponsorship of securitisation activities (possible percentage reduction, together with an estimate of the amount that would become available as a result).

vi) The extent to which the institution should remain willing to repurchase outstanding marketable debts instruments; the institution should also provide information in this connection about the amount of the outstanding liabilities, classified by funding type; the institution should determine the size of the liquid assets that it believes it will need for any repurchase or repayment of debts instruments during the period of its chosen stress scenarios.

vii) The extent to which liquidity support must be provided to non-consolidated group entities or participating interests in order to limit the reputational risk.

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viii) The effects that the restrictions referred to above might have on the profitability of the institution and their impact on the (future) solvency position.

J: Foreign exchange liquidity risk (currency and FX swap risk) (Annex V to the revised Banking Directive, points 14, 14a, 15, 16, 17, 18, 19 and 22) Rationale In special circumstances forex markets may cease to operate normally, with the result that FX contracts can be concluded and/or performed only with difficulty. As a result, institutions may run much greater liquidity risks in the currency concerned than appears from the position at an aggregated level. Evaluation objective The supervisor assesses whether the institution adequately manages the liquidity risk for each currency. Assessment criteria To ensure a good liquidity management, the institution should have and make use of:

i) Maturity calendars showing the incoming and outgoing gross cash flows for each significant currency, from which it is possible to identify currency mismatches in the currency concerned.

ii) Limits on the cumulative liquidity mismatch position for each significant currency, subdivided into limits for each group entity.

iii) Information about the manner in which outgoing net cash flows can be financed in a given currency in normal and stressed conditions; examples are:

▪ the level and composition of the available liquidity cushion of marketable paper and/or paper eligible for use as collateral;

▪ the funding capacity in all significant currencies at the disposal of the institution in the present circumstances for each funding instrument;

▪ the main counterparties and the credit and forex limits available in the various significant currencies;

▪ committed backup facilities and other liquidity provisions for each significant currency;

▪ an overview of possible restrictions on the convertibility of the currencies used by the institution.

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II.6 Early warning indicators (Annex V to the revised Banking Directive, points 14, 15 and 18) (See also Part I, section 5, of this Manual) Rationale Market indicators often provide an early warning of possible liquidity problems in an institution. If an institution is to be able to make its own assessment of developments relating to funding sources, it needs to monitor data concerning funding costs and other price data. To this end early warning indicators must be defined and used. Evaluation objective The supervisor assesses whether the institution makes efficient use of market indicators in order to identify and address negative developments in relation to funding costs and market access in good time. Assessment criteria The following are examples of indicators that can be monitored by an institution for this purpose (not all of these examples may be relevant to all institutions): � The prices of shares in relation to an index for financial institutions. � The development of the profits of the institution as a whole and any increases or falls in

the profits of business lines or group entities that make a substantial contribution in proportionate terms to the total profit of the institution.

� The 5-year CDS spreads over the past six months, compared with a sector-wide index;26 � money market trading prices, margins above interbank rates (EURIBOR, LIBOR,

EONIA) for interbank deposits, CP and CD prices. � Price levels (including margins) for capital market funding. � Prices in the secondary market for MTNs, bonds, subordinated loans and/or other debt

instruments (e.g. ABCP), where these prices can be compared with the prices of government paper having a comparable maturity/duration or other relevant sector-wide indices.

� The net growth of various types of funding (retail/wholesale). � Changes in the cost of funding for each type of funding. � Developments concerning early repayments of retail and wholesale funding. � Higher margin or collateral requirements when raising credit. � A decline in the credit facilities available at correspondent banks. � The credit assessments and publicity relating to the institution. � Expected increases in the requisite collateral as a consequence of the occurrence of events

in covenants triggering 1, 2 or 3 notch downgrades. � The access to open market facilities of the ECB and other central banks. � The extent to which the institution possesses the infrastructure, requisite collateral and

operational support to gain access to secured markets, including open market operations of central banks.

26For example, comparison of the iTraxx Europe index or iTraxx Financials Senior in the US with the relevant CDX index.

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II.7 Fund Transfer Pricing: allocation of liquidity costs, benefits and risk (Annex V to the revised Banking Directive, point 14) (See also Part I, section 4, of this Manual) Rationale Liquidity costs, benefits and risks should be incorporated in the calculation of the internal cost price, in the performance evaluation process, in the provision of incentives and in the approval process for new product and/or exposures in order to promote prudent liquidity risk management. Evaluation objective The supervisor assesses to what extent the liquidity costs and benefits are passed on in products or allocated to business lines in good time and to what extent the cost and risk structures of the institution are aligned, thereby ensuring that exposure to liquidity risk is not facilitated by incorrect pricing in the internal allocation of costs and benefits. Assessment criteria To demonstrate that the liquidity cost benefit allocation mechanism works adequately, the institution should provide information relating to:

i) The yield curve for the institution as a basis for calculating the liquidity costs for the various products used by it.

ii) The liquidity premium that the institution itself applies for the various maturities and/or products.

iii) The credit margin(s) that the institution itself applies for the various maturities and/or products.

iv) The bid-offer spreads that are applied by the institution for the different maturities and/or products.

v) To what extent option components are taken into account in determining liquidity costs.

vi) What assets/liabilities are set off in calculating the liquidity premium.

vii) How the internal pricing method is applied during the (new) product approval process.

viii) How the internal pricing method affects the performance management of business units, business lines and/or business activities.

ix) Up to what level of transaction the internal pricing method applies.

x) The extent to which the same internal pricing method used in the euro is applied to the various currencies in which the institution is active.

xi) The frequency of the internal pricing updates.

xii) How the updates are communicated within the business in Dutch and foreign group entities.

xiii) To what extent the internal pricing method applies to Dutch and foreign group-related institutions.

xiv) Procedures for dealing with identified implausible cost allocations and for approving and departing from such allegations within the governance structure.

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II.8 The Funding Plan (Annex V to the revised Banking Directive, points 18 and 21) (See also Part I, sections 1 and 5, of this Manual) Rationale Liquidity and funding can be managed in normal conditions by early strategic decisions on the type and duration of funding obtained by the institution. In order to be able to take the right decisions, the institution has a funding plan for the coming years. This funding plan should be updated if market conditions change, in order to ensure that the institution has a timely plan enabling it to address undesirable developments in the liquidity or funding position. This takes into account the funding needs in all relevant currencies in which the institution is active. The funding needs should be estimated in the manner that is most realistic for the institution. Evaluation objective The supervisor assesses whether the funding plan is appropriate to the complexity of the institution, its short-term and long-term liquidity position and any expected movements in this position. Assessment criteria The funding plan should be drawn up on the basis of information about:

i) Contractual cash flows, by means of an overview, based on contractual data, of all cash flows in respect of exposures to be received back or funding to be repaid in each significant currency and for each time horizon; a distinction should in any event be made between the following: ▪ issue of own debt instruments (broken down by product or instrument and short or

long funding); ▪ unsecured interbank deposits; ▪ secured funding (broken down by repos, covered bonds, securitisations, etc); ▪ intra-group exposures; ▪ demand deposits (stable and non-stable); ▪ term deposits; ▪ other balance sheet items.

ii) Expected cash flows: an overview of expected cash flows that should be taken into account given the size of the institution (capital expenditures, expected developments relating to demand deposits and fixed-rate and term deposits, special deals, dividends, taxes, acquisitions and so forth).

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The funding plan should also contain:

iii) An overview of planned withdrawals, specifying the intended maturities of each funding type, product or instrument and each significant currency, distinguishing in any event between the following: ▪ issue of own debt instruments (broken down by product or instrument and short or

long funding); ▪ unsecured interbank deposits; ▪ other unsecured funding; ▪ secured funding (broken down by repos, covered bonds, securitisations, etc); ▪ demand deposits (stable and non-stable); ▪ term deposits; ▪ intra-group exposures; ▪ other planned inflows.

iv) The present funding profile and the profile envisaged by the institution in due course; the information should reveal: ▪ the present and future composition of the funding, broken down by the above-

mentioned types of funding (absolute amounts and percentages distribution in relation to the total funding);

▪ present and intended funding concentrations; ▪ the time horizon for migration to a different funding profile; ▪ the factors that influence (or may influence) the achievement of the intended change.

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II.9 The Contingency Funding Plan (Annex V to the revised Banking Directive, points 21 and 22) (See also Part I, sections 11, of this Manual) Rationale For the purposes of good liquidity management an institution should have a Contingency Funding Plan (CFP) setting out the funding strategy and actions that can be implemented if market-wide stress, institution-specific stress or a combination of the two occurs. Such circumstances can affect the liquidity position of the institution in unforeseen ways and the CFP contains an overview of predefined measures that can mitigate the liquidity risks associated with the stress conditions. Evaluation objective The supervisors should assess the quality of the CFP and the depth and expected feasibility of the proposed actions. The supervisor should also assess how the plan would affect the institution directly both as a consequence of the proposed actions to mitigate the liquidity risk as well as from a macro-prudential perspective. Assessment criteria On the basis of stress tests the institution should be able to indicate the following for the CFP (including arguments as to why this is suitable for the institution):

i) What changes in the funding needs (different from normal business conditions) may be brought about by each risk driver in stressed conditions and what the net effect of all risk drivers together would be on the total funding needs; examples of relevant information may include:

▪ quantification of the total conditional liquidity demand, where the institution provides further information, if possible for each liquidity risk factor, concerning the level of the required conditional liquidity and the moment when or time horizon in which this may occur;

▪ determination of the loss of funding where market forces substantially cease to operate or specific markets dry up; the institution can assess the loss for each sub-market;

▪ in connection with the above, the impact of varying problems on the possibility of selling or collateralising assets from the liquidity cushion; the institution should provide an approximation of the size of these securities expressed in liquidation values (amounts);

▪ an analysis of the extent (amounts) to which it is likely that liquidation of liquidity cushions will not be possible – or possible only after much delay – as a consequence of legal, administrative, operational or geographical restrictions.

ii) What actions listed in the institution’s CFP would be necessary in the scenarios applied in its ILAAP in order to remain within the liquidity limits applied by the institution; the matters to be dealt with in this part should include:

▪ what amounts and what additional costs the institution would expect to incur and what funding instruments it would have to use and within what specific markets in order to achieve the desired funding and risk profile;

▪ what extra demands the institution expects to make on central bank facilities (specify amounts);

▪ what funding concentrations the institution would have, both before and after implementing the CFP actions;

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▪ what effects the entry into force of the CFP would have for the internal pricing system;

▪ quantification of the financial consequences for the institution as a consequence of the conditional funding plan; whether reputational damage is possible and what effect this would have on profits (amounts and percentages).

iii) Provision of evidence that the assumptions concerning the extent to which the relevant liquidity cushions can be liquidated or the availability of funding sources and the time required for this on the basis of the stress test results are sufficiently realistic; the institution should compare the assumptions concerning the amounts of funding to be achieved and the required time horizon with the results of the stress test; any differences between the assumptions and the stress test results should prompt an adjustment of the CFP and, where necessary, an increase in the contingency cushions or an enlargement of the contingency funding.

iv) To what extent:

▪ changes in the level, composition or distribution of liquidity cushions across the group or group entities would be necessary and within what time horizon the institution should implement these changes;

▪ adjustments to the limits structure and to the measures for risk mitigation would be necessary in order to remain within the liquidity risk tolerance limits set by the institution.

v) For all significant currencies the CFP contains actions specifically aimed at countering outflows in those currencies and the estimated liquidity value and timing of these actions are set in a prudent manner when their effect is cross border and the execution depends on (FX-swap) markets.

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II.10 Use of central bank facilities (Annex V to the revised Banking Directive, points 15, 16, 17, 18 and 20) (See also Part I, section 7, of this Manual) Rationale The central bank acts as lender of last resort, but also provides for open market operations. The institution should be aware of the extent to which it is reliant on central bank funding (now and in the future) and the restrictions concerning access to the professional market that this can entail (or that are indicative of this). Evaluation objective The supervisor should assess whether the extent to which the institution makes use of open market or other central bank facilities is commensurate with the activities of the institution and its position within the financial system. Assessment criteria The following data provide information about the historical and expected use of central bank facilities and the collateral required for this purpose and can be used by the supervisor to assess the extent of the institution’s reliance on the central bank:

i) The use of the main refinancing operations (MRO, totals per subscription period and average use over the last 12 months).

ii) The use of longer term refinancing operations during the last 12 months (LTRO, totals per subscription period).

iii) The use of the marginal lending facility (MLF) during the last 12 months (indication of the date on which use was made of the MLF).

iv) The use made of facilities of central banks other than the ECB during the past 12 months (statement of amounts and currencies of borrowing, maturities and specific periods).

v) The amount of outstandings on the deposit facility during the past 12 months (daily statement, insofar as applicable).

vi) The amount of the reserve outstandings during the past 12 months.

vii) The level and composition of the collateral pools for central bank facilities during the past 12 months.

viii) The expected use of central bank facilities for the next 12 months (specified according to MRO, LTRO or other).

ix) The expected (requisite) level and composition of collateral (pools) for central bank facilities.

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II.11 Other relevant data (Annex V to the revised Banking Directive, points 14, 19, 20 and 21) (See also Part I, section 1, of this Manual) Rationale As mentioned previously, the explanatory notes contained in this manual are not intended to be exhaustive. Institutions should therefore collect and use all other data relevant to liquidity risk management. Evaluation objective The supervisor should assess whether the institution makes sufficient allowance for factors, elements and other matters of importance to it but not included in this Manual. Assessment criteria The institution should show that it has given due thought to the activities and data relevant to its ILAAP and makes use, if applicable, of data additional to the examples and summaries contained in the Manual. Examples are:

i) The growth of assets and liabilities in the past twelve months, if relevant divided into significant currencies.

ii) Indications of changes in the liquidity mismatches in significant currencies in the past twelve months.

iii) Important changes in concentrations of assets or liabilities during the past six months.

iv) Major changes in the parameters of rating agencies that are considered important by the institution and which it uses for management purposes; the institution should show developments during the past 12 months and the values or outcomes it aims to achieve.

v) Important incidents concerning internal limits or supervision standards and the actions taken.

vi) The last approved and applied measures to mitigate liquidity risk.

vii) The date of the last approved revision of the liquidity contingency plan.

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68

[C] EBA Second part of technical advice to the European Commission on liquidity risk management (CEBS/EBA 2008 147) van 18 september 2008 Overarching principle – The application of the following recommendations should reflect the principle of proportionality, as set out in the Pillar 2 provisions of Directive 2006/48/EC and highlighted in the introductory statements of CEBS’s Guidelines on the Supervisory Review Process9. Both institutions and supervisors should take into account the diversity of institutions’ liquidity risk profiles. Governance Recommendation 1 – The Board of Directors should approve the liquidity strategy, policies and practices developed by senior management. The Board should ensure that risk management policies are suited to the institution’s level of liquidity risk, its role in the financial system, its current and prospective activities, and its level of risk tolerance. The Board should have a clear view of the risks implied by the institution’s degree of reliance on maturity transformation and should ensure that an adequate level of long-term funding is in place. The strategy, policies and practices should consider both normal and stressed times and should be reviewed regularly, including (at a minimum) when there are material changes. The Board should ensure that senior management defines adequate processes and organisational structures to implement these strategies and policies. Recommendation 2 - Institutions should have in place an adequate internal mechanism – supported where appropriate by a transfer pricing mechanism – which provides appropriate incentives regarding the contribution to liquidity risk of the different business activities. This mechanism should incorporate all costs of liquidity (from short to long-term, including contingent risk). Recommendation 3 – The organisational structure should be tailored to the institution and should provide for the segregation of duties between operational and monitoring functions in order to prevent conflict of interests. Special attention should be paid to the powers and responsibilities of the unit in charge of providing funds. All time horizons, from intraday to long-term, should be considered when tasks are allocated, as they entail different challenges for liquidity risk management. The institution should have sufficient well trained staff, adequate resources, proper coordination and overview, and independent internal control and audit functions. Recommendation 4 – At the highest level of all groups there should be awareness of the strategic liquidity risk and liquidity risk management as well as adequate knowledge of the liquidity positions of members of the group and the potential liquidity flows between different entities in normal and stressed times, taking into account all potential market, regulatory, and other constraints. Recommendation 5 - Institutions should have appropriate IT systems and processes that are commensurate with the complexity and materiality of their activities and the techniques they use to measure liquidity risks and related factors. The adequacy of the IT systems and processes should be reviewed regularly. Influencing factors and operational components of liquidity management Recommendation 6 – The liquidity of an asset should be determined based not on its trading book/banking book classification or its accounting treatment but on its liquidity-generating capacity. Supervisory distinctions between the trading and banking books should not have a major or undue impact on liquidity management. Recommendation 7 - When using netting arrangements institutions should consider and address all legal and operational factors relating to the agreements in order to ensure that the risk mitigation effect is assessed correctly in all circumstances. Recommendation 8 - The liquidity risk due to documentation risk and possible implicit support should be taken into account in the overall liquidity risk management framework. In particular, covenants in contracts for complex financial products, such as those related to securitisation and/or ‘originate to distribute’ business, should be identified and addressed explicitly in liquidity policies. Institutions

69

should consider whether SPV’s/conduits should be consolidated for liquidity management purposes. The related liquidity risk should be determined by stress tests and addressed in an appropriate Contingency Funding Plan. Institutions’ liquidity management should consider explicitly the extent to which contingent liquidity risk should be addressed by readily available liquidity reserves as opposed to other counterbalancing capacity. Covenants linked to supervisory actions or thresholds should be strongly discouraged. Recommendation 9 - In order to ensure sound collateral management institutions should: - have policies in place to identify and estimate their collateral needs as well as all collateral resources, over different time horizons; - understand and address the legal and operational constraints underpinning the use of collateral, including within control functions; - have an overall policy, approved by senior management, that includes a conservative definition of collateral and specifies the level of unencumbered collateral that should be available at all times to face unexpected funding needs; and - implement these policies and organise collateral management in a way that is suited to the operational organisation. Recommendation 10 - Institutions should have cash and collateral management systems that adequately reflect the procedures and processes of different payment and settlement systems in order to ensure effective monitoring of their intraday needs, at the legal entity level as well as at the regional or group level, depending on the liquidity risk management in place. Recommendation 11 - Regardless of whether an institution uses net or gross payment and settlement systems, it should actively manage its intraday liquidity positions to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Recommendation 12 - Institutions should adopt an operational organisation to manage short-term (overnight and intraday) liquidity within the context of their strategic longer-term objectives of structural liquidity risk management. Institutions should also set up continuous monitoring and control of operations, have at their disposal sufficient intraday funding, assign clearly defined responsibilities, and establish adequate back-up procedures to ensure the continuity of operations. Special attention should be paid to monitoring sources of unexpected liquidity demands under stressed conditions. Internal methodologies to identify, measure, monitor and mitigate liquidity risk Recommendation 13 - Institutions should verify that their internal methodology captures all material foreseeable cash inflows and outflows, including those stemming from off-balance sheet commitments and liabilities. They should assess the adequacy of their methodology for their risk profiles and risk tolerance. Internal methodologies should be tested regularly according to predefined policies. If assumptions or expert opinions are used they should also be assessed regularly. These reviews should be documented adequately and their results communicated to senior management. Recommendation 14 - Institutions should conduct liquidity stress tests that allow them to assess the potential impact of extreme but plausible stress scenarios on their liquidity positions and their current or contemplated mitigants. They should regularly project cash flows under alternative scenarios of varying degrees of severity, taking into account both market liquidity (external factors) and funding liquidity (internal factors). To provide a complete view of various risk positions, stress testing of other risks may be usefully considered in constructing ‘alternative liquidity scenarios’. When 10 assessing the impact of these scenarios on their cash flows institutions should employ a set of reasonable assumptions that should be reviewed regularly. The results of stress tests should be reported to senior management and used to adjust internal policies, limits, and contingency funding plans when appropriate. Recommendation 15 - Institutions should have adequate contingency plans, both for preparing for, and for dealing with a liquidity crisis. These procedures should be tested regularly in order to minimise

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delays resulting from legal or operational constraints, and to have counterparties ready to be involved in any transaction. Recommendation 16 - Liquidity buffers are of utmost importance in time of stress, when an institution has an urgent need to raise liquidity within a short timeframe and normal funding sources are no longer available or do not provide enough liquidity. These buffers, composed of cash and other highly liquid unencumbered assets should be sufficient to enable an institution to weather liquidity stress during its defined ‘survival period’ without requiring adjustments to its business model. Recommendation 17 - Institutions should actively monitor their funding sources to identify potential concentrations, and they should have a well diversified funding base. Potential concentrations should be understood in a broad sense, encompassing concentrations in terms of providers of liquidity, types of funding (secured vs. unsecured), marketplaces, and products, as well as geographic, currency, or maturity concentrations. Transparancy to the market Recommendation 18 - Institutions should have policies and procedures that provide for the disclosure of adequate and timely information on their liquidity risk management and their liquidity positions, both in normal times and stressed times. The nature, depth, and frequency of the information disclosed should be appropriate for their different stakeholders (liquidity providers, counterparties, investors, rating agencies, and the market in general). Supervisory approach to liquidity risk management and internal methodologies Recommendation 19 - Supervisors should have methodologies for assessing institutions’ liquidity risk and liquidity risk management. Appropriate resources should be allocated specifically to supervising liquidity risk and how it is managed by institutions. Recommendation 20 - When setting priorities for the supervision of liquidity risk, supervisors should take into account: - the liquidity risk profiles of institutions in order to apply a proportionate approach to their supervision; and - the level of systemic risk that they present. Recommendation 21 - When assessing an institution’s liquidity risk profile, supervisors should pay special attention to the institution’s process for identifying all liquidity risks and – at a minimum – to its reliance on wholesale sources of funding, the concentration of funding sources, the level of maturity transformation, the position within a group, and, more generally, its business profile, risk tolerance, and stress resistance. The overall exposure to other risks and its possible negative impact on the level of liquidity risk should be analysed in conjunction with the institution’s funding profile. Special attention should be paid to collateral management. Recommendation 22 - Supervisors should verify the adequacy and effective implementation of the strategies, policies, and procedures setting out institutions’ liquidity risk tolerance and risk profiles, and ensure that they cover both normal and stressed times. Recommendation 23 - When assessing the quality of liquidity risk management, supervisors should pay particular attention to the adequacy of the institution’s liquidity risk insurance, especially for stressed situations. Supervisors should pay particular attention to the marketability of assets and the time that the institution would actually need to sell or pledge assets (taking into account the potential role of central banks). Recommendation 24 - Supervisors should verify that institutions have dedicated policies and procedures in place for crisis management. Supervisors should pay particular attention to the existence of appropriate stress tests, the composition and robustness of liquidity buffers, and the effectiveness of contingency funding plans. In particular, supervisors should verify that robust and well-documented stress tests are in place and that their results trigger action. The assumptions used should be appropriate

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and sufficiently conservative, and regularly reviewed. Supervisors should check that contingency funding plans build on the stress test exercises and are regularly tested. Recommendation 25 - Supervisors should consider whether their quantitative supervisory requirements, if any, could be supplemented or replaced by reliance on the outputs of institutions’ internal methodologies, providing that such methodologies have been adequately assessed and provide sufficient assurance to supervisors. Recommendation 26 - Under the proportionality principle, supervisors may consider their standardised regulatory approach (if they have one), as a key element in the internal liquidity risk management of less sophisticated institutions. Recommendation 27 - When using internal methodologies for supervisory purposes, supervisors should assess the adequacy of governance, the soundness of methodologies - including their conservatism and completeness- , the timeliness of reviews, the robustness of stress testing, and resilience to liquidity crises, taking into account external constraints on the transferability of liquidity and the convertibility of currencies. Recommendation 28 - Supervisors should have at their disposal precise and timely quantitative and qualitative information which allows them to measure the liquidity risk of the institutions they supervise and to evaluate the robustness of their liquidity risk management. Recommendation 29 – The supervisors of cross-border groups should coordinate their work closely, in particular within the colleges of supervisors, in order to better understand groups’ liquidity risk profiles and endeavour to avoid unnecessary duplication of requirements, notably through enhanced exchanges of information. When appropriate, they should actively consider the delegation of tasks relating to the supervision of branches’ liquidity. Recommendation 30 - Supervisors should use all the information at their disposal in order to require institutions to take effective and timely remedial action when necessary. They should explore the possibility of having tools that provide them with early warnings to facilitate preventive supervisory action

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[D]: EBA Guidelines on Liquidity Buffers & Survival Periods, december 2009 Guideline 1 – A liquidity buffer represents available liquidity, covering the additional need for liquidity that may arise over a defined short period of time under stress conditions.

Guideline 2 – Institutions should apply three types of stress scenarios: idiosyncratic, market specific, and a combination of the two. The core of the idiosyncratic stress should assume no rollover of unsecured wholesale funding and some outflows of retail deposits. The market-wide stress should assume a decline in the liquidity value of some assets and deterioration in funding-market conditions.

Guideline 3 – A survival period of at least one month should be applied to determine the overall size of the liquidity buffer under the chosen stress scenarios. Within this period, a shorter time horizon of at least one week should also be considered to reflect the need for a higher degree of confidence over the very short term.

Guideline 4 - The liquidity buffer should be composed of cash and core assets that are both central bank eligible and highly liquid in private markets. For the longer end of the buffer, a broader set of liquid assets might be appropriate, subject to the bank demonstrating the ability to generate liquidity from them under stress within the specified period of time.

Guideline 5 – Credit institutions need to manage their stocks of liquid assets to ensure, to the maximum extent possible, that they will be available in times of stress. They should avoid holding large concentrations of particular assets, and there should be no legal, regulatory, or operational impediments to using these assets.

Guideline 6 – The location and size of liquidity buffers within a banking group should adequately reflect the structure and activities of the group in order to minimize the effects of possible legal, regulatory or operational impediments to using the assets in the buffer.

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[E]: EBA Guidelines on the Management of Concentration Risk under the Supervisory Review Process, september 2010 (sectie 4.4. inzake liquidity risk) General considerations and principles for concentration risk management Guideline 1 – The general risk management framework of an institution should clearly address concentration risk and its management. Guideline 2 – In order to adequately manage concentration risk, institutions should have an integrated approach for looking at all aspects of concentration risk within and across risk categories (intra- and inter-risk concentration). Guideline 3 – Institutions should have a framework for the identification of intra- and inter-risk concentrations. Guideline 4 – Institutions should have a framework for the measurement of intra- and inter-risk concentrations. Such measurement should adequately capture the interdependencies between exposures. Guideline 5 – Institutions should have adequate arrangements in place for actively controlling, monitoring and mitigating concentration risk. Institutions should use internal limits, thresholds or similar concepts, as appropriate. Guideline 6 – Institutions should ensure that concentration risk is taken into account adequately within their ICAAP and capital planning frameworks. In particular, they should assess, where relevant, the amount of capital which they consider to be adequate to hold given the level of concentration risk in their portfolios. Management and supervision of concentration risk within individual risk areas Guideline 7 – Institutions should employ methodologies and tools to systematically identify their overall exposure to credit risk with regard to a particular customer, product, industry or geographic location. Guideline 8 – The models and indicators used by institutions to measure credit concentration risk should adequately capture the nature of the interdependencies between exposures. Market risk Guideline 9 – An institution’s assessment of concentration risk should incorporate the potential effects of different liquidity horizons that can also change over time. Operational risk Guideline 10 – Institutions should clearly understand all aspects of operational risk concentration in relation to their business activities. Guideline 11 – Institutions should use appropriate tools to assess their exposure to operational risk concentration.

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Liquidity risk Guideline 12 – In order to be able to identify all major kinds of liquidity risk concentrations, institutions need to have a good understanding of their funding and asset structure and be fully aware of all underlying influencing factors over time. When relevant, depending on its business model, an institution should be aware of the vulnerabilities stemming from its funding and asset structure, e.g. from the proportions of retail and wholesale funding on the liability side or large concentrations of single securities in their liquid assets buffer, that should be avoided. Also, when relevant, the identification of liquidity risk concentrations should include an analysis of geographic specificities. Finally, the identification of concentrations in liquidity risk should take into consideration off-balance sheet commitments. Guideline 13 – In identifying their exposure to funding concentration risk institutions should actively monitor their funding sources. A comprehensive analysis of all factors that could trigger a significant sudden withdrawal of funds or deterioration in institutions’’ access to funding sources (including, for example, in the form of asset encumbrance) should be performed. Guideline 14 – The qualitative assessments of concentrations in liquidity risk should be complemented by quantitative indicators for determining the level of liquidity risk concentration. Guideline 15 – Institutions should take into account liquidity risk concentrations when setting up contingency funding plans. Supervisory review and assessment Guideline 16 – Supervisors should assess whether concentration risk is adequately captured in the institution’s risk management framework. The supervisory review should encompass the quantitative, qualitative and organisational aspects of concentration risk management. Guideline 17 – In cases where supervisory assessment reveals material deficiencies, supervisors, if deemed necessary, should take appropriate actions and/or measures set out in the Article 136 of the CRD. Guideline 18 – Supervisors should assess whether institutions are adequately capitalised and have appropriate liquidity buffers in relation to their concentration risk profile, focusing on buffers (liquidity and capital) in relation to the unmitigated part of any concentration risk. Guideline 19 – Supervisors should assess whether concentration risk is adequately captured in firm-wide stress testing programmes. Guideline 20 – In the case of a cross-border operating institution, appropriate discussions should be held between consolidating and host supervisors to ensure coordination of supervisory activities, and that concentration risk is adequately captured within the institution’s risk management framework. Results of the assessment of the level of concentration risk and concentration risk management should be taken into account in the risk assessment of the institution and discussed in the relevant college of supervisors.

Guideline 21 – Supervisors in their reviews should pay particular attention to those institutions which are highly concentrated, e. g. by geographical region of operation, customer type and specialised nature of product or funding source (specialised institutions).

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[F]: EBA Revised Guidelines on Stress Testing, 26 augustus 2010 Governance aspects of stress tests and use Guideline 1 – The management body10 has ultimate responsibility for the overall stress testing programme of the institution. Its engagement is essential for the effective operation of stress testing. The management body should be able to understand the impact of stress events on the overall risk profile of the institution. Guideline 2 – The stress testing programme should be an integral part of an institution’s risk management framework and be supported by an effective infrastructure. Guideline 3 – Stress testing programmes should be actionable and inform decision making at all appropriate management levels of an institution. Guideline 4 – An institution should have clear responsibilities, allocated resources and written policies and procedures in place to facilitate the implementation of the stress testing programme. Guideline 5 – The institution should regularly review its stress testing programme and assess its effectiveness and fitness for purpose. Stress testing methodologies Stress testing methodologies: sensitivity analysis Guideline 6 – Institutions should perform sensitivity analyses for specific portfolios or risks. Stress testing methodologies: scenario analysis Guideline 7 – Institutions should undertake scenario analysis as part of their suite of stress tests which should be (i) dynamic and forward- looking and (ii) incorporate the simultaneous occurrence of events across the institution. Guideline 8 – An institution should identify appropriate and meaningful mechanisms for translating scenarios into relevant internal risk parameters that provide a firm-wide view of risks. Guideline 9 – System-wide interactions and feedback effects should be incorporated within scenario stress testing. Stress testing methodologies: severity of scenarios Guideline 10 – Stress testing should be based on exceptional but plausible events. The stress testing programme should cover a range of scenarios with different severities including scenarios which reflect a severe economic downturn. Stress testing methodologies: reverse stress testing Guideline 11 – Institutions should develop reverse stress tests as one of their risk management tools to complement the range of stress tests they undertake. Portfolio, individual risk and firm-wide stress testing

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Guideline 12 – Institutions should perform stress tests on specific portfolios and the specific types of risk that affect them. Consideration should also be given to changes in correlations between risks that the institution identifies for a given portfolio. Guideline 13 – Stress testing should be conducted on a firm-wide basis18 covering a range of risks in order to deliver a complete and holistic picture of the institution’s risks. Outputs of stress testing programmes and management intervention actions Guideline 14 – An institution should identify outputs in relation to its regulatory capital and resources, and also relevant balance sheet and P&L impacts, as a result of its stress testing programme. Guideline 15 – Institutions should identify credible management actions addressing the outputs of stress tests and aimed at ensuring their ongoing solvency through the stressed scenario. Stress tests under ICAAP Guideline 16 – Institutions should evaluate the reliability of their capital planning based on stress test results. Guideline 17 – Stress tests under ICAAP should be consistent with an institution’s risk appetite and strategy and contain credible mitigating management actions. Supervisory review and assessment Guideline 18 – Supervisors should undertake regular reviews of institutions’ stress testing programmes covering scenario selection, methodologies, infrastructure and use of stress tests. Guideline 19 – Supervisors should review stress testing outputs in order to assess the resilience of individual institutions to adverse economic conditions and whether they are able to maintain sufficient capital and liquidity. In doing this, supervisors should take into account details of movements in capital and capital needs, and liquidity and liquidity needs, under stressed conditions. Guideline 20 – Supervisors should evaluate and challenge the scope, severity, assumptions and mitigating actions of firm-wide stress tests. Guideline 21 – In the case of a cross-border operating institution, appropriate discussions should be held between consolidating and host supervisors to ensure coordination of supervisory activities, including the stress testing activities, and also that firm-wide stress tests are undertaken at group level to address all the material risks of the institution and that stress test results reflect the impact of a scenario on the group as a whole. Results of such group level firm-wide stress tests should be taken into account in the risk assessment of the institution and discussed in the relevant college of supervisors. Guideline 22 – Supervisors may consider recommending scenarios to institutions and undertaking their own stress tests on an individual institution-specific basis as well as implementing system-wide stress test exercises based on common scenarios as a part of their assessment of the overall system’s resilience to shocks.

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[G]: EBA Guidelines on Liquidity Cost Benefit Allocation van 27 oktober 2010 Guideline 1 – The liquidity cost benefit allocation mechanism is an important part of the whole liquidity management framework. As such, the mechanism should be consistent with the framework of governance, risk tolerance and the decision-making process. Guideline 2 – The liquidity cost benefit allocation mechanism should have a proper governance structure supporting it. Guideline 3 – The output from the allocation mechanism should be actively and properly used and appropriate to the business profiles of the institution. Guideline 4 – The scope of application of internal prices should be sufficiently comprehensive to cover all significant parts of assets, liabilities and off-balance sheet items regarding liquidity. Guideline 5 – The internal prices should be determined by robust methodologies, taking into account the various factors involved in liquidity risk.

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[H]: BCBS Principles for Sound Liquidity Risk Management and Supervision, September 2008 Fundamental principle for the management and supervision of liquidity risk Principle 1 – A bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. Supervisors should assess the adequacy of both a bank's liquidity risk management framework and its liquidity position and should take prompt action if a bank is deficient in either area in order to protect depositors and to limit potential damage to the financial system. Governance of liquidity risk management Principle 2 – A bank should clearly articulate a liquidity risk tolerance that is appropriate for its business strategy and its role in the financial system. Principle 3 – Senior management should develop a strategy, policies and practices to manage liquidity risk in accordance with the risk tolerance and to ensure that the bank maintains sufficient liquidity. Senior management should continuously review information on the bank’s liquidity developments and report to the board of directors on a regular basis. A bank’s board of directors should review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively. Principle 4 – A bank should incorporate liquidity costs, benefits and risks in the product pricing, performance measurement and new product approval process for all significant business activities (both on- and off-balance sheet), thereby aligning the risk-taking incentives of individual business lines with the liquidity risk exposures their activities create for the bank as a whole. Measurement and management of liquidity risk Principle 5 – A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons. Principle 6 – A bank should actively manage liquidity risk exposures and funding needs within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity. Principle 7 – A bank should establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers to promote effective diversification of funding sources. A bank should regularly gauge its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid. Principle 8 – A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Principle 9 – A bank should actively manage its collateral positions, differentiating between encumbered and unencumbered assets. A bank should monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner. Principle 10 – A bank should conduct stress tests on a regular basis for a variety of institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential

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liquidity strain and to ensure that current exposures remain in accordance with a bank’s established liquidity risk tolerance. A bank should use stress test outcomes to adjust its liquidity risk management strategies, policies, and positions and to develop effective contingency plans. Principle 11 – A bank should have a formal contingency funding plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. A CFP should outline policies to manage a range of stress environments, establish clear lines of responsibility, include clear invocation and escalation procedures and be regularly tested and updated to ensure that it is operationally robust. Principle 12 – A bank should maintain a cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios, including those that involve the loss or impairment of unsecured and typically available secured funding sources. There should be no legal, regulatory or operational impediment to using these assets to obtain funding.

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Public disclosure Principle 13 – A bank should publicly disclose information on a regular basis that enables market participants to make an informed judgement about the soundness of its liquidity risk management framework and liquidity position. The role of supervisors Principle 14 – Supervisors should regularly perform a comprehensive assessment of a bank’s overall liquidity risk management framework and liquidity position to determine whether they deliver an adequate level of resilience to liquidity stress given the bank’s role in the financial system. Principle 15 – Supervisors should supplement their regular assessments of a bank’s liquidity risk management framework and liquidity position by monitoring a combination of internal reports, prudential reports and market information. Principle 16 – Supervisors should intervene to require effective and timely remedial action by a bank to address deficiencies in its liquidity risk management processes or liquidity position. Principle 17 – Supervisors should communicate with other supervisors and public authorities, such as central banks, both within and across national borders, to facilitate effective cooperation regarding the supervision and oversight of liquidity risk management. Communication should occur regularly during normal times, with the nature and frequency of the information sharing increasing as appropriate during times of stress.

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[I]: EBA Guidelines on the Application of the Supervisory Review Process under Pillar 2, januari 2006 Guidelines on Internal Governance IG 1: Institutions should have a corporate structure that is transparent and organised in a way that promotes and demonstrates the effective and prudent management of the institution both on a solo basis and at group level. IG 2: The reporting lines and the allocation of responsibilities and authority within an institution should be clear, precise, well defined,transparent,coherent, and enforced. IG 3: Institutions should ensure that the risk management function is organised in a way that facilitates the implementation of risk policies and the management of the institution’s risks. IG 4: The responsibilities of the management body should be clearly defined in a written document. They should include setting the institution’s business objectives, risk strategies and risk profile, and adopting the policies needed to achieve these objectives. IG 5: The management body should ensure that strategies and policies are communicated to all relevant staff throughout the organisation. IG 6: The management body should systematically and regularly review the strategies and policies for managing the risks of the institution. IG 7: The management body should develop and maintain strong internal control systems. IG 8: The management body should ensure that internal control systems provide for adequate segregation of duties, in order to prevent conflicts of interest. IG 9: The management body should set effective strategies and policies to maintain, on an ongoing basis, amounts, types and distribution of both internal capital and own funds adequate to cover the risks of the institution. (See ICAAP section for further details.) IG 10: The management body should monitor and periodically assess the effectiveness of the institution’s internal governance structure. IG 11: The management body should be active and independent, and should be able to explain its decisions to the supervisory authority and other interested parties. IG 12: The management body should have policies for selecting, compensating, monitoring and planning the succession of key executives. IG 13: The management body should promote high ethical and professional standards and an internal control culture. IG 14: Institutions should establish, making adequate allowance for the principle of proportionality, the following three primary functions in order to implement an effective and comprehensive system of internal control in all areas of the institution, namely (i) risk control function, (ii) compliance function, and (iii) internal audit function. IG 15: The risk control function should ensure compliance with risk policies. IG 16: The compliance function should identify and assess compliance risk. IG 17: The internal audit function should allow the management body to ensure that the quality of the internal controls is effective and efficient. IG 18: There should be effective internal control systems and reliable information systems covering all significant activities of the institution.

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IG 19: The management body should put in place appropriate internal alert procedures for communicating internal governance concerns from the staff. IG 20: Institutions should meet the generally agreed transparency requirements in the conduct of their business.. IG 21: Each institution should present its current position and future prospects in a balanced, accurate and timely way. Guidelines on ICAAP ICAAP 1: Every institution must have a process for assessing its capital adequacy relative to its risk profile (an ICAAP). ICAAP 2: The ICAAP is the responsibility of the institution. ICAAP 3: The ICAAP’s design should be fully specified, the institution’s capital policy should be fully documented, and the management body (both supervisory and management functions) should take responsibility for the ICAAP. ICAAP 4: The ICAAP should form an integral part of the management process and decision making culture of the institution. ICAAP 5: The ICAAP should be reviewed regularly. ICAAP 6: The ICAAP should be riskbased. ICAAP 7: The ICAAP should be comprehensive. ICAAP 8: The ICAAP should be forwardlooking. ICAAP 9: The ICAAP should be based on adequate measurement and assessment processes. ICAAP 10: The ICAAP should produce a reasonable outcome. Guidelines on SREP SREP 1: The SREP should be an integrated part of the authority's overall risk based approach to supervision. SREP 2: The SREP should apply to all authorised institutions. SREP 3: The SREP should cover all the activities of an institution. SREP 4: The SREP should cover all material risks and internal governance. SREP 5: The SREP will assess and review the institution's ICAAP. SREP 6: The SREP will assess and review the institution's compliance with the requirements laid down in the CRD. SREP 7: The SREP should identify existing or potential problems and key risks faced by the institution and deficiencies in its control and risk management frameworks; and it should assess the degree of reliance that can be placed on the outputs of the institution's ICAAP. SREP 8: The SREP will inform supervisors about the need to apply prudential measures.

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SREP 9: The results of the SREP will be communicated to the institution at the appropriate level (usually the management body) together with any action that is required of the institution and any significant action planned by the supervisory authority. SREP 10: The supervisory evaluation should be formally reviewed at least on an annual basis, to ensure that it is up to date and remains accurate. Guidelines on RAS RAS 1: In order to carry out an overall assessment of an institution, the supervisory authority should define guidelines covering both risks and controls. RAS 2: In order to assess an institution’s risks and controls, the supervisor needs to prepare a breakdown of the institution’s activities, down to the material business units or processes where risks are actually taken and where to a large extent controls are actually applied. RAS 3: A Risk Assessment System should encompass all relevant risks and internal governance factors, while at the same time making a clear distinction between the two. RAS 4: In order to make the results of all risk assessments comparable, both between the various institutions within a country and between countries, the results of the supervisory authorities’ risk assessments should be based on an assessment of both quantitative and qualitative information. RAS 5: Procedures for quality assurance should be in place in order to maintain the quality and consistency of risk assessments. RAS 6: The supervisory authority should compare the results of the RAS with the outcome of the ICAAP and analyse their consistency. Guidelines on the dialogue Dialogue 1: Supervisors should have a methodology to structure the dialogue with the institution Dialogue 2: The structure of the dialogue comprise four main elements. Dialogue 3: Supervisors should use the dialogue with the institution to test and challenge the institutions’ ICAAP and to exchange views, in order to reach a better understanding of the underlying assumptions and processes. Dialogue 4: The frequency and depth of the dialogue will be determined by the supervisor, according to its assessment of the risk profile and/or systemic importance of each institution. Guidelines on prudential measures Measures 1: Prudential measures to address issues identified either through the SREP or as part of ongoing supervision should be applied promptly. Measures 2: Prudential measures should be communicated promptly and in sufficient detail.

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Annex 2: Agreed Upon Procedures ILAAP (Q&A Open Boek Toezicht) In the Internal Liquidity Assessment Process, the quality of the required data and documents is of paramount importance. Therefore the business operations of banks should comprise an adequate system of information provisions and communication, accompanied by an appropriate, robust and independent internal control system. In order to ensure this, DNB requires banks that they provide DNB with an “agreed upon procedures report”, prepared by the institution’s Internal Audit Department (IAD). In the next paragraphs guidance concerning the contents of the agreed upon procedure engagement letter is provided. The engagement of the IAD takes the form of so called “agreed upon procedures” as described in the “Richtlijnen NV COS 4400 ”27. Scope The objective of the engagement is the reporting process that starts with extracting data from the financial accounts (and risk systems where appropriate) and that results in the completion and submission of ILAAP templates and other data and documents as requested by DNB. This reporting process should be based upon the applicable principles and recommendations of EBA and BCBS, including:

• Second part of EBA’s technical advice to the European Commission on liquidity risk

management (EBA 2008 147) , September 2008;

• EBA Guidelines on Liquidity Buffers & Survival Periods, December 2009;

• EBA revised Guidelines on the Management of Concentration Risk under the Supervisory

Review Process, September 2010 (section 4.4. liquidity risk);

• EBA Revised Guidelines on Stress Testing, Augustus 2010;

• EBA Guidelines on Liquidity Cost Benefit Allocation, October 2010;

• BCBS Principles for Sound Liquidity Risk Management and Supervision, September 2008;

• Guidelines on the Application of the Supervisory Review Process under Pillar 2, January 2006;

• Liquidity Identity Card EBA, June 2009;

• BCBS International framework for liquidity risk measurement, standards and monitoring,

December 2010.

The evaluation of the ILAAP by DNB will be prepared along the lines of the Supervision Manual

ILAAP, which is available on “Open Boek Toezicht” on www.dnb.nl. This manual may be used as a

starting point for the IAD as well. DNB requests institutions to explicitly include the following elements

as part of the agreed upon procedures engagement letter:

1. In the engagement letter it will be noted that the Report of Findings is one of the documents

DNB requires the institution to provide as part of the ILAAP-package;

2. Assessment by the auditor on whether calculations are carried out on group wide or solo basis;

3. Assessment whether the institution has documented the liquidity risk governance framework

including the roles and responsibilities of the internal stakeholders (including the board

members) and whether this documentation contains as a minimum:

- a liquidity tolerance or a liquidity risk appetite statement;

- limits for the main sources of liquidity risk (the so-called ‘risk drivers’) of the institution;

- control systems and/or monitoring tools for monitoring liquidity positions against limits;

27 Issued by Dutch Association of Acoountants (NBA)

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- maturity ladders and liquidity mismatches;

- reports on the aspects of the liquidity buffer (size, composition, maturity, valuation);

- descriptions of stress testing methodologies and stress test scenarios;

- model validation procedures;

- funding plan;

- a contingency funding plan;

- quality controls;

- documentation on motivated assumptions and expectations (regarding behavioral aspects and

(stress test) scenarios) and approved (contingent) funding plans;

- a mechanism for fund transfer pricing;

- peer group reviews to benchmark the institution against its (international) peers;

- a policy on the handling of exceptions;

- a policy for escalation procedures;

- signing off procedures;

- relevant reconciliations.

4. Assessment whether the institution has prepared the ILAAP dataset in conformity and

consistently with the above mentioned guidelines, principles and the internal liquidity risk

governance framework.

5. Assessment of the existence, completeness and accuracy of the data flow from the source

systems - such as the general ledger and risk systems - to the ILAAP dataset.

6. Assessment of quality controls and quality assurance in the form of manual checks and

programmed procedures.

7. Assessment of the completeness, accuracy and consistency of all material data the institute is

requested to collect in the DNB ILAAP templates within the above mentioned scope of the

engagement. The institution should define what threshold is used as a materiality threshold and

this threshold should be stated and underpinned in the documentation provided to DNB;

8. Assessment of the existence and plausibility of documentation with explanations provided by

the institution on deviations from instructions or the non-delivery of requested data28;

9. Assessment that all required ILAAP documents and data are uploaded through e-line.

DNB requests banks to include the IAD’s agreed upon procedures engagement letter in the submission

of the Report of Findings to DNB. The completed ILAAP report should be signed off by the board of

directors before submitting it to DNB. DNB expects to receive the internal auditors’ Report of Findings

as integral part of the ILAAP submission documentation.

Annex 3: ILAAP-package: Contents & Delivery 28 For instance in case of blank cells, a valid explanation is given why the cell is left blank

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DNB will formally request submission of the ILAAP-package. This document lists the information that should be included in the ILAAP-package and provides details on the method of delivery to DNB. Required documents in the ILAAP-package:

1. Sign off by (a member of) the board of directors; 2. Readers manual; 3. Overview of the group structure including intra-group (or intra-company for branches)

cash flows; 4. Completed ILAAP Self Assessment template in the prescribed format29; 5. Completed ILAAP Data Template in the prescribed format1;

a. Explanatory note with details on interpretations made regarding the data template or with details when instructions were not followed as well as explanation on the scope (group / solo) of the report;

6. An ILAA-process description, including the governance of the ILAAP; 7. An overview of relevant findings by the Internal Audit Department; 8. Other supporting documents:

a. Description of relevant liquidity risk governance, including the risk appetite framework and the risk appetite statement;

b. The funding plan (including market access policy); c. The contingency funding plan; d. An overview of the contribution of business lines and/or entities to the P&L of

the institution; e. Recent internal reports to senior management on the liquidity position and buffer

composition; f. Recent internal reports on the outcomes of stress tests on the sources of liquidity

risk and evidence of resultant actions taken; g. The stress testing methodology and validation reports with regard to stress

testing models and assumptions; h. The transfer pricing mechanism; i. The limit and control system regarding liquidity risk; j. Other documents relevant for the evaluation of the ILAAP, according to the

sound principles on liquidity risk management (such as, on intraday liquidity risk management, on collateral management, on currency liquidity risk management, on disclosure, etcetera).

Required delivery method of the ILAAP-package DNB requests you to provide the ILAAP-package documentation through e-line. The ILAAP-form will be available in e-line at least one week before the deadline set for delivery of the ILAAP-package and will be available for the month for which the data is provided30. You can use DOC(X), XLS(X), ZIP, etc formats. Please note, that a maximum of 2MB per attachment is applicable. In case this size limit proves to be an insolvable obstacle, please contact your supervisor well before expiration of the deadline for an alternative delivery method of the ILAAP-package.

29 Downloadable from www.dnb.nl 30 For example: for data provided in November based on June data, the form will be available for June only.