Attachment 5 Liquidity Contingency Plan and Liquidity Risk by taoyni


									                                 Attachment 5

                    Liquidity Contingency Plan and
                   Liquidity Risk Management Policy
Comments and suggestions offered by the PricewaterhouseCoopers
Consulting Team under T.A. 3098 PRC, Strengthening the Banking
Supervision and Liquidity Management System

I. The Liquidity Contingency Plan should:

      A. begin by indicating:

               the official or the Committee of the bank that approved the plan

               when the plan was approved

               how often the plan will be routinely reviewed.

      B. Specify the general objectives of the Plan. For example,

             1. The objective of the plan is to protect depositors, creditors and

             2. To accomplish that end the Bank recognizes need to establish
             guidelines and directions for identifying and managing the
             resolution of possible serious liquidity problems.

      C. Specify developments that may indicate that the bank may be facing a
      serious liquidity problem and thus give cause to activate the Plan. Such
      developments as:

             1. Other banks experiencing liquidity problems

             2. Unusual, disturbing developments in the money market, such as
             sharp rise in interest rates

             3. One or more Offices of Bank of Shanghai experiencing outflow
             of funding or currency drain; market rumors suggest bank has

             4. Adverse development in bank’s performance, such as earnings
             loss, sharp rise in nonperforming assets, sharp fall in bank’s stock

       price, sharp increase in interest rate charged bank in the interbank

       5. Sharp fluctuations in securities markets, foreign exchange
       markets, or in economic variables such as inflation rate, economic
       activity, etc.

D. Designate the official or the committee of the bank responsible for
assessing a developing situation and deciding that the contingency plan
should be activated. For recommendation, see immediately below.

E. Responsibilities, Authorities and Delegated Authorities

       1. Specify who has overall responsibility for managing execution of
       the plan? Could be the governor of the bank alone or his designee
       (who should be specifically identified in the plan), or could be the
       ALM Committee which is headed by the Governor. (Will assume
       hereafter that the Committee has been designated.)

              a. ALM Committee should be informed immediately of any of
              the developments listed above or others with the potential to
              have an adverse impact on the bank and quickly make its
              assessment as to whether the Plan should be activated

              b. Other actions to be taken by ALM Committee if it decides
              to activate the Plan:

                  alert the various departments and offices of the bank of
                  the problem and the plan’s activation. (Arrangements for
                  carrying out this action—who specifically to carry it out
                  and how-- should be specified here or elsewhere in the

                 decide when it is time to notify the PBOC.

                  decide whether the ALM Committee will be responsible
                  for ongoing management of the plan or that that
                  responsibility should be delegated to a Funding Crisis
                  Management Team (FCMT). The FCMT, if designated,
                  should be composed of the Governor (who will serve as
                  its chairman), the bank's chief financial officer, and other
                  selected ALM Committee members. Will assume
                  hereafter that an FCMT is designated.

                  Decide when a problem situation has been resolved and
                  the Plan can be deactivated.

       2. Responsibilities and authorities of the FCMT

       The FCMT should be kept informed of all information that is
       pertinent to the bank’s current or prospective liquidity

       Make all major decisions on marketing loans or deposits,
       investment purchases, borrowing ( particularly from the
       PBOC), whether to stop making additional loans, etc.

       Provide general, ongoing guidance on communicating with
       major deposit customers and other sources of funding,
       internal staff, and the press

       The FCMT should be prepared to meet as often as its
       Chairman, or his designee, deems necessary

3. Delegated responsibilities and authorities.

       Delegation should be made to the Heads of each of the
       departments listed below, with instruction that he/she is
       responsible for establishing a framework of procedures and
       specifications for carrying out the assigned tasks within their
       respective departments. These procedures and
       arrangements should be established as soon after the Plan
       is approved as is possible, and should be submitted to the
       ALM Committee for review and approval. One specification
       should be the designation of one or more persons to serve
       as backups for the Head of the Department in directing the
       execution of the Plan.

       When alerted by the FCMT that the contingency plan has
       been activated, the department head should take charge in
       the implementation of these arrangements.

       a. Treasury Department Responsibilities

              Management of the reserve payment account
              and in general taking steps to enhance the bank’s
              liquidity position

              If begin to lose deposits or other funding, Treasury
              Department will take actions to obtain funds to meet
              the loss. The plan should provide guidance with
              regard to the approach to be followed in the order of

selection of alternative funding options. As an
example, the guidance might specify the following

       (If a branch) borrow from the Head Office of
       the bank

       Cash out low interest earning assets

       Increase repurchase agreements based on
       Treasury securities

       Borrow funds unsecured in the interbank

       Sell longer term government bonds

       Borrow from the PBOC

Communication with major funds suppliers in effort to
assure continued funding. (In the ordinary course of
its operations, moreover, the Department should
periodically borrow from each of its funding sources
as a means of testing continued availability.)

When alerted of the Plan’s activation, review terms,
conditions and amounts of backup sources of funding
and decide whether greater amounts from firm credit
line commitments are needed. Discuss results of such
review with the FCMT and get guidance on which
institutions to approach if additional lines are thought

Inform FCMT immediately of any adverse market
developments that might impact the bank

Provide regular reports to FCMT on liquidity status of
the bank and changes therein. Reports to be as
frequent as the acuteness of the situation demands.

Use data on foreign currency exposure reported by
the International Departments with Treasury
Department data on RMB risk exposure to prepare
these reports. Such measures should be calculated
routinely during normal business conditions, but more

      frequently when the bank is experiencing a serious
      liquidity problem.

b. International Department

      Daily monitoring of the bank’s foreign currency
      liabilities and assets ( in the aggregate and by country
      of issue)

      Take steps to reduce exposures if instructed by the

      Report all adverse developments in foreign currency
      markets immediately to FCMT and to Treasury

      Provide regular reports on bank’s foreign currency
      status to FCMT; frequency to depend on acuteness of
      the situation

      Communicate with major funds suppliers
      in an effort to assure continued availability.

      Provide Treasury Department with regular reports on
      the Bank’s foreign currency liquidity risk exposure, the
      frequency to be decided by how acute the situation is
      judged to be.

c. Accounting Department ( or whichever department is
responsible for currency management)

      Make sure that bank has sufficient reserves of RMB
      and foreign currency. Bank should have existing
      arrangements with other banks and should review
      and gain assurance of their continued availability

      Make sure bank has the capability to deliver the
      currency to any of the offices of the bank that may
      come under pressure— that is, has sufficient vehicles
      to carry currency and to provide protection for the
      carrying vehicle; adequate space in vaults or
      elsewhere to safely store the currency; extra guards
      available to guard the currency.

      Report any significant currency drain to FCMT and
      report on remaining status of currency reserve

            Regular report to FCMT on status of currency
            reserves and ability to deliver

     d. Corporate Finance Department and Individual Finance

            In consultation with the Treasury Department and
            International Departments monitor developments in
            accounts of businesses and individuals, particularly
            those of significant size

            Maintain communication with major customers

            Keep Treasury Department and International
            Department informed of oncoming loan requests

F. Communication

     1. Good communication is of critical importance in managing
     a serious liquidity problem ( or any problem for that matter).
     Specific staff should be designated in this plan (or perhaps in
     an Appendix to this plan) that are authorized to
     communicate with deposit and loan customers, funds
     suppliers, the PBOC and the press. Should be designated by
     name and by position in the bank. Different staff will be
     designated to communicate with different parties.

     2. Staff should be given general training on how to handle
     discussions in a crisis situation.

      3. During a crisis, the FCMT should be a clearinghouse for
     all relevant information and should be given the
     responsibility to coordinate the bank’s communication
     efforts, making clear what should be said to the parties listed
     above. Suggestions:

            Make sure all communications are consistent

            Don’t lie; try to get all bad news out at one time and
            not have a series of bad reports

            If there is a problem, say there is problem and what
            is being done to correct it.

       4. It is important to keep staff of the bank informed about any
       problem situation and to enlist their help in resolving it.

               Helps to avoid false rumors and morale problems

               Avoids staff making incorrect comments to customers
               of the bank

               Gives opportunity to warn against spreading rumors

G. Reporting

       1. Should establish standard reports that should be
       forwarded routinely by the departments to the FCMT and to
       other relevant departments or persons of the bank

2. Should establish frequency of when these reports are to be
submitted, with the understanding that frequency of reports may
increase depending on how acute the situation.

H. Testing the Plan

       1. Should specify that Plan will be tested at some time after
       its formulation and then routinely thereafter when the ALM
       Committee believes that is necessary

       2. Test by specifying the existence of a hypothetical problem
       and then simulate how the bank’s officers and staff respond
       to the problem in following the Plan’s specifications. Need to
       consult with experts to decide how to do this effectively.

I. Administration

       1.Once a year the Head of the Treasury Department should
       prepare a report for the ALM Committee that summarizes:

               a. The bank’s compliance with the provisions of the
               liquidity plan

               b. The results of simulation tests conducted, training
               provided and other activities undertaken to strengthen
               the bank’s ability to carryout the contingency plan

                              c. Gives a general assessment of the bank’s overall
                              preparedness to address a possible serious funding

               J. Should have a short section that says: “All acts to be taken by
               the bank under this Plan should comply with all regulatory guidance
               and the laws of the People’s Republic of China.”

               K. Perhaps, should also have an exceptions paragraph which says:
               “Whenever circumstances require prompt action that will violate
               provisions of the contingency plan but which is nevertheless
               prudent under the circumstances, the Governor of the bank is
               authorized to approve the exception.”

               L. List of names and telephone numbers (office, cell phone, car,
               home, fax machine) and e-mail addresses of all members of the
               ALM Committee, all heads of departments and other personnel
               designated to play a key role in executing the contingency plan
               should be provided at end of the contingency plan.

               M. A copy of the Plan should be provided to everyone on the list.

II. A good framework and content for a liquidity risk management policy for Bank
of Shanghai , we believe, would include the following:

A. Policy Identification and Ratification

              Identify the policy and indicate who approved it and when it was
              promulgated, who will review it and when, and how it is to be

              Spell out the basic objectives of the policy and indicate the functions
              and actions that need to be carried out to achieve this objective.

              Specify the responsibilities and authorities that the ALM Committee
              wishes to retain, and the responsibilities and authorities that it is
              delegating to the bank’s Treasury Department and the International

B. Basic Objective of the Policy

                            To establish a framework for management of liquidity
risk that will assure that the bank will have sufficient liquidity resources to meet
its legal obligations to meet the requests of depositors to withdraw their funds

from the bank and for loans from its creditors in a timely way, and to provide
funding to customers who have firm commitments from the bank

C. Goals of the Policy

       Assure that the bank has adequate liquidity resources to meet its liquidity
       needs while, at the same time, avoiding, to the extent possible, an excess
       of liquidity

       Assure that the ALM Committee possesses an accurate assessment of
       the potential liquidity needs of the bank

       Assure that procedures are established for effective monitoring of the
       liquidity condition of the bank, its branches, sub branches and any
       changes therein

       Assure that the liquidity policy is properly coordinated with other related
       asset/liability policies of the bank

       Assure that guidance is provided on how liquidity resources are to be
       drawn down to meet a funding need.

       Assure that the ALM Committee receives regular reports on the bank’s
       liquidity condition and is informed immediately if any problems should

       Assure that procedures are established for assessing, and modifying if
       necessary, the “backup” sources of liquidity for the bank

       Assure that the liquidity risk management policy, and the bank’s
       contingency liquidity risk management policy, are compatible and

       Assure that administrative matters, such as staff training and back up
       personnel for key liquidity management staff of the bank, are properly

D. Responsibilities, Authorities and Delegated Authorities

1. Liquidity risk management responsibilities and authorities of the ALM

           Establish and review the bank’s liquidity risk management policy

          Assure that the liquidity risk management policy is coordinated and
          properly integrated with other ALM Committee policies for the bank

          Set targets and ranges for key balance sheet or income statement
          ratios to assure that the needed liquidity capacity of the bank is
          maintained at all times, while providing sufficient flexibility to enable
          the bank to address short term fluctuations in liquidity pressures

          Provide general guidance on the sequence to be followed in drawing
          on the bank’s liquidity sources to meet a liquidity drain

          Establish and change policy for interest rates paid on deposits or
          charged on loans

          Promulgate a contingency liquidity plan and establish the capability to
          guide and closely monitor the bank’s staff performance if it is ever

         Establish internal controls for liquidity risk management and conduct
         reviews of findings of internal auditors and examiners relative to these

2. Delegated authority

         Authority is delegated to the Treasury Department and the
         International Department (?) to carry out the following activities and
         functions. Such departments in the branches and sub-branches of the
         bank should carry out the functions specified and report results to their
         Head Office counterparts. The International Department should carry
         out these functions for the bank’s foreign currency exposure and report
         the results to the manager of the Treasury Department

            1) Day to day management of the bank’s reserve/clearing balance
            with the PBC, assuring that the balance at all times complies with
            the requirements of the PBC and Chinese law while avoiding
            balances that are substantially above these requirements

            2) Efforts to anticipate transactions that can place a substantial
            impact on the reserve/ clearing account balance by consulting with
            the other departments of the bank (business finance, individual
            finance, investment) and to plan for dealing with such events

3) Decisions on the general order for drawing down resources to
meet temporary liquidity pressures, consistent with the ALM
Committee’s general guidance

4) Monitor market conditions and report any unusual
developments to the ALM Committee

5) Periodically make a fundamental assessment of the ability to
meet liquidity pressures the bank may face under different
scenarios-- normal conditions, a bank specific problem, and
systemic problem in the market place. (See next section for
discussion) and report results and recommendations to ALM

6) Periodically assess the adequacy and dependability of backup
liquidity arrangements, considering the resources that can be
tapped, certainty of doing that, and whether additional resources are
needed, and report results and recommendations to ALM

7) Maintain liquidity ratios within ranges specified by the ALM
Committee and promptly report any deviation from these ranges to
ALM Committee

8) Carry out responsibilities defined in the liquidity contingency plan

9) Establish and maintain effective management information

10) Assure that staff is adequately trained and that staff members in
key positions are backed up by qualified staff members

11) Decide whether adjustments need to be made to firmly
committed credit lines and those with MAC clauses

12) Assess the degree of diversity of credit and deposit sources and
the strength of relationships the bank has with these sources

13) Assure that lines of credit from each specified source are
frequently tested.

14) In consultation with ALM Committee chairman, manage public
disclosure so that bank’s true financial position is properly

15) Prepare monthly reports of bank’s liquidity risk exposure for the
ALM Committee

16) Develop recommendations for necessary policy changes and
refer them to the ALM Committee for action

17) When providing collateral to secure contracts, use less liquid
assets when possible in order to conserve assets that are more
liquid for emergency conditions.


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