Liquidity Contingency Funding Plan Workshop 2024 PDF

Your Bank of Choice Liquidity Contingency Funding Plan Workshop 27 November 2024 Market and Liquidity Risk Presentation By : 1. Norhayati Masol 2. Mohd Sairi Mat Saidi 3. Mohd Rahmat Ngah Confidential Strict...

Your Bank of Choice Liquidity Contingency Funding Plan Workshop 27 November 2024 Market and Liquidity Risk Presentation By : 1. Norhayati Masol 2. Mohd Sairi Mat Saidi 3. Mohd Rahmat Ngah Confidential Strictly for Bank Rakyat Only CONTENTS 01 Lesson learn- Liquidity 02 Introduction to Liquidity Crisis Past Events Contingency Funding Plan 03 Implementation of the 04 Components of a Liquidity Contingency Funding Plan Contingency Funding Plan 05 Test Case 06 Q&A Session  01 Your Bank of Choice PART Lesson Learn-Past Liquidity Crisis Event SILICON VALLEY BANK (SVB) Liquidity Crisis Event SVB’S EVENTS $42bil Bank RUN within 48hours 8/3 10/3 Announcement to California Department of raise capital $1.75b Financial Protection and Innovation seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC) Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 5  SVB HAS THESE FINANCIALLY STRONG INDICATORS Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 6  Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 7  DRASTIC $ in billions 2022 2021 2020 BALANCE TOTAL ASSETS 216 166 85 SHEET TOTAL DEPOSIT 186 147 75 AFS 29 25 19 GROWTH HTM 88 53 11 Drastic increase in deposit with high concentration in Tech companies Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 8  CONTRIBUTION TO SVB’S COLLAPSE DESPITE HEALTHY LIQUIDITY, CAPITAL AND CREDIT  CONCENTRATION RISK  Wholesale deposits – US tech companies  Low Insured deposit by FDIC Confidential 9 Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report  Elevated client cash burn pressuring balance of fund flows Start selling the AFS to meet the cash outflows and obligations – chunky Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report wholesale withdrawal Confidential 10  AFS LOSSES EXACERBATING SVB’S bonds are fixed rate and long term, where as deposit shorter LIQUIDITY CRISIS tenure and rising in COF Increase in interest rate, causing Bond prices to drop Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 11  NO HEDGE : AFS PORTFOLIO WITH RECEIVE –FLOATING SWAPS Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Confidential 12 Source : SVB’s Q1 2023 Market Update, FY2022 Annual Report Washington Mutual (WaMu) Liquidity Crisis Event  WaMu’S EVENTS WaMu founded in 1889, as Washington National Building Loan and Investment Association in Seattle, Washington. It was a small, regional Subprime Mortgage savings and loan association. Crisis WaMu’s Failure 1889 2007 2008 SEP 2008 FDIC seizure WaMu’s Rapid The largest and sale of Growth. savings and assets to WaMu stock loan JPMorgan peaks at association in Chase for the U.S. by $1.9 billion over $40 per share due to 2008 Total Assets: aggressive $307Bil expansion in mortgage Total Deposits: lending. $188bil Confidential 14  The Causes of WaMu's Collapse The rapid increase in subprime loan issuance WaMu Loan Portfolio from 2003 to 2007. Breakdown 2007 10% Subprime Mortgages Prime Mortgages 20% 40% 15 Alt-A Loans (less risky than subprime) Other Assets 30% WaMu aggressively expanded into the subprime mortgage market, including adjustable-rate mortgages and interest-only loans, which were highly risky. Confidential 15  WaMu's Financial Trouble Loan Defaults: A rapid increase in mortgage defaults, especially in the subprime category, put immense pressure on WaMu’s balance sheet. Liquidity Crisis: In September 2008, WaMu experienced a bank run. Depositors withdrew over $16 billion in just 10 days. U.S. Housing Price Index vs. WaMu’s Loan Defaults (2007-2008) 200 180 160 140 120 100 80 60 40 20 Declining Stock Price: WaMu’s stock price dropped by more 0 than 90% between 2007 and 2008, signaling the market’s loss of confidence. HPI index WaMu's Mortgages Default Rate Confidential 16 Government Intervention & FDIC's Role FDIC Seizure and JPMorgan Acquisition WaMu Stock Wamu faces Price insolvency as plummeted, and stock collapses Bank Run Occur WaMu’s Assets and JPMorgan Purchase Price (Sept 2008) FDIC steps in and FDIC Seizure seizes WaMu’s Value of Assets ($Billion) assets 350 307 300 JPMorgan 250 Sale to Chase acquires JPMorgan 200 WaMu’s assets Chase for $1.9 Bil 150 100 50 1.9 0 WaMu'Assets JPMorgan Purchase Price Confidential 17  02 Your Bank of Choice PART Introduction to Liquidity Contingency Funding Plan  Definition and Importance 01 02 03 Liquidity Contingency Importance in Financial Impact on Risk Management Funding Plan Stability  Concept of having a backup plan to  Helps maintain operational continuity  Mitigates the risk of forced liquidation of access funds during a crisis. during financial disturbances. assets  Ensuring the Bank can meet its short-  Enhances trust among stakeholders by  Provides a cushion against unexpected term obligations without disruptions showing preparedness. market changes. mechanisms involved in activating  Prevents liquidity crunches that could lead  Helps in maintaining adequate cash flow contingency funding sources. to solvency issues. under adverse conditions. 19 Confidential  Regulatory Context 01 02 03 Relevant Regulatory Compliance Regulatory Bodies Guidelines Requirements Involved  Basel III liquidity Formal contingency funding  Role of BNM standards and their plan (CFP) that strategies for in liquidity regulations. requirements addressing liquidity shortfall impacting liquidity in emergency. planning. The CFP outline policies to  BNM Policy manage stress event and Document(PD) such clear lines of responsibility, as LCR, NSFR and clear invocation and escalation procedure. Liquidity Risk  The CFP must be regularly tested and updated for operational robust. 20 Confidential  Objectives of the LCFP Part 01 Part 02 Part 03 Procedure Communication and Plan Role and Responsibility Management Ensure the Bank has Timely and precise Clear role and responsibility procedures in place for information and for all related personnel to accessing funds during communication to facilitate ensure effective and efficient emergency the Bank to make quick management of liquidity crisis decisions 21 Confidential  03 Your Bank of Choice PART Implementation of the Contingency Funding Plan  Governance and Oversight Board Of Directors Board Of Risk Committee (BRC)  To Oversee Liquidity Risk Management. Liquidity  Timely update BOD and BRC on Management management of liquidity crisis event Committee (LMC) for effective communication and informed Bank strategic direction. 23 Confidential  Term of Reference of LMC Liquidity Management Chairperson Committee (LMC) CEO MEMBERS OTHER REQUIREMENTS 1. Chief Executive Officer (CEO). Quorum: Majority (more than 50%) of the 2. Deputy Chief Executive Officer, Business. Committee members of whom one must be the Committee 3. Deputy Chief Executive Officer, Operations. Chairperson or the alternate 4. Chief Finance Officer. Chairperson. 5. Chief Risk Officer. Decision: Majority. In case there is deadlock 6. Chief Business Banking Officer. in decision, such as 50-50 votes, Chairperson has the casting vote. 7. Chief Retail Banking Officer. Frequency: As and when required 8. Chief Treasury Officer. 9. Chief Strategy & Transformation Officer 10. Secretary: SVP Financial Risk 24 Confidential  Liquidity Management Committee (LMC) Action Plan Objective: Minimising the impact on the Bank’s financial position. Analysis and Monitoring Communication and Reporting  Notify BOD and BRC on the severity of the situation and explain the actions to be taken.  Continuously assess and monitor liquidity  Communicate to regulator on the situation and actions to be taken. risk ratios and position.  Inform the customer and public on the situation and explain the Bank’s action plans.  Notify all business units and continuously advise them on the actions to be taken; and  Ensure that the staffs involve in LMC are aware with their roles and responsibilities if the LMC is evoke. Mitigation Plan for Liquidity Crisis Post Crisis Assessment  Possible mitigation plan that may be utilized  Continuously monitor the adequacy of funding by the Bank (depending on the situation). position.  Prepare report for BOD and BRC on all action taken during the crisis. 25 Confidential  04 Your Bank of Choice PART Components of a Liquidity Contingency Funding Plan  Liquidity Crisis Identification 02 01 Credit Risk/ Market Risk Indicator Liquidity Risks Indicator 03 Other indicators and situation that could likely trigger a liquidity crisis  Unsubstantiated rumours or negative perception of the Bank that could impact the Bank’s liquidity position.  Substantial financial losses arising from litigation claim on the Bank;  Substantial financial losses from fraud case. 27 Confidential  Mitigation Plan For Liquidity Crisis Liability Related Strategy Assets Related Strategy Other Related Strategies Treasury Funding Treasury Assets  Seek Funding from market via interbank  Allow premature withdrawal of  Selectively approve new deposit. the Bank deposit placement financing or defer any decision  Secure Deposit by offering higher rate of (asset management). until situation return to normal to the deposits.  Start selling or liquidating all reduce large fund utilization.  Utilize available standby credit line investment holdings in the order  Review all financing lines given facility. of its credit rating i.e., AAA, AA, to customer and if possible, with  Contact counterparts from other Banks etc. agreement of the customer, for possible back up credit line. reduce any unused line.  Unilateral rollover of the money market  Stricter collection process placement/interbank receiving. needs to be enforced to ensure  Seek customer consent to defer any continuation of cash inflow. large drawdown of funds.  Potential of limiting access of  Refer to BNM for lender of last resort. cash for MEPS Card holder, in  Sell Eligible financing to Cagamas via which priority to access the purchase with recourse program. Bank’s ATM given to the BKRM  Issue commercial paper and medium- card holders. term note (MTN) (liability management). 28 Confidential  Detail Mitigation Plan For Liquidity Crisis Timing Required Business Units / (Timing of cashflow/timing to No Mitigation Plans for Liquidity Crisis Remarks Stakeholders obtain the funding / timing to execute plans) Liability Related Strategy – Treasury Funding 1. Seek Funding from market via interbank deposit Treasury (MNMK) Same day 2. Secure Deposit by offering higher rate of the Treasury (MNMK) Same day deposits 3. Utilize available standby credit line facility Treasury (MNMK)(CRSB)  Maybank Islamic RM200 mil  Bank Islam RM200 mil T+1 day After utilisation requested to CRSB.  OCBC RM300 mil  CIMB Islamic RM300 mil 4. Contact counterparts from other Banks for Treasury (CRSB) Backup lines including CCM & SBBA possible back up credit line. T+1 day with interbanks 5. Unilateral rollover of the money market Treasury (MNMK) Usually Interbank placement maturity placement/interbank receiving will be pay to the counterparty first then Same day the counterparty will replace back after they sighted the incoming funds at their end. 6. Seek customer consent to defer any large Treasury (MNMK) T-30 days As per our current practice. drawdown of funds. 7. Refer to BNM for lender of last resort Treasury (MNMK) (The amount of repo to BNM will be based on Same day To notify BNM before 3.30PM the Bank’s current HQLA market value) 8. Sell Eligible financing to Cagamas via purchase Finance (Capital Subject to availability of eligible with recourse program. Management) 2 – 4 weeks financing to be sold to Cagamas. 9. Issue commercial paper and medium-term note Finance (Capital Process include approval from ALCO & (MTN) (liability management) Management 2-3 months Board, market updates & bookbuilding. 29 Confidential  Detail Mitigation Plan For Liquidity Crisis Timing Required Business Units / (Timing of cashflow/timing to No Mitigation Plans for Liquidity Crisis Remarks Stakeholders obtain the funding / timing to execute plans) Assets Related Strategy – Treasury Assets 10. Allow premature withdrawal of the Treasury (MNMK) (No incident observed in the Bank deposit placement (asset market) management) To provide the counterparty T-2 days with written notice at least two days in advance of premature placement. 11. Start selling or liquidating all Treasury (FXIN) Timing to execute plan - Same Depends on market demand investment holdings in the order of its day on transaction day and amount credit rating i.e., AAA, AA, etc. Timing to obtain funding – T+2 of funding needed. days 30 Confidential  Detail Mitigation Plan For Liquidity Crisis Timing Required Mitigation Plans for Liquidity Business Units / (Timing of cashflow/timing No Remarks Crisis Stakeholders to obtain the funding / timing to execute plans) Other Strategies 12. Selectively approve new Chief Business Banking financing or defer any decision Officer (CBBO) until situation return to normal to Chief Retail Banking reduce large fund utilization Officer (CRBO) 13. Review all financing lines given to Chief Business Banking customer and if possible, with Officer (CBBO) agreement of the customer, Business Banking Centre reduce any unused line (BBC) LMC to decide on the execution of these strategies. 14. Stricter collection process needs Chief Collection & to be enforced to ensure Recovery Officer (CCRO) continuation of cash inflow 15. Potential of limiting access of ATM Operations (ATMO) cash for MEPS Card holder, in Digital Retail Platform which priority to access the (DREP) Bank’s ATM given to the BKRM card holders 31 Confidential  Activation and Execution of LCFP Process 01. 02. 0. 04. 32 Confidential  Activation and Execution of LCFP Process 01. 02. 0. 04. 33 Confidential  Activation and Execution of LCFP Process 01. 02. 0. 04. 34 Confidential  Monitoring and Reporting Regular Monitoring Activities Internal and External Reporting Key Performance Indicators (KPIs) Reporting to Stakeholders 35 Confidential  05 Your Bank of Choice PART Test Case  Test Case 1 Background The Bank has a significant number of payments scheduled on the current day, resulting in substantial cash outflows from their account. These obligations arise due to various factors, including the non-rollover of a large deposit that was initially expected to be renewed or extended. Without the expected deposit rollover, the Bank must meet these payment commitments without Successful Implementations additional liquidity from the rollover. Situation The Bank utilized their K-account (a special reserve account typically used for intraday liquidity management), which is designed to cover short-term liquidity gaps, due to the non-rollover of the deposit leaves the Bank available liquidity insufficient to cover their obligations. As a result, The excessive payments drain the available funds in the K-account, leading to a higher- than-usual utilization of this account. Based on the information provided below, has the situation triggered either the MAT or crisis alert limit? What are the necessary escalation and mitigation actions that need to be taken? Position RM’Bil % of Liquidity Risk MAT Crisis Alert 31 Nov 24 Utilization Indicator Limit Utilization of K-account Utilization of K- account 70% of the At 12.00 4.0 ? RM5.0Bil (Intraday Liquidity Limit PM Position 37  Test Case 2 Background As of 31st November 2024, The Bank Maximum Cumulative Outflows (MCO) analysis indicated a potential shortfall/outflow of RM8 billion within the 1st bucket (up to 1-week). This shortfall could trigger the Management Successful Action TriggerImplementations (MAT), signaling the risk of liquidity stress that would require immediate action to avoid a default or regulatory non-compliance. Based on the information provided below, has the situation triggered either the MAT or crisis alert limit? What are the necessary escalation and mitigation actions that need to be taken? Position Nov 24 RM’Bil Total Funding 90.31 MCO ? Liquidity Risk Indicator MAT Crisis Alert Limit Maximum Cumulative Outflow (MCO) Up to 1 Week >10% of total funding 85% of the Limit >1 Week to 1 Months >12% of total funding 38  Test Case 3 Oct Nov Dec Overnight Policy Rate (OPR) RM’Bil 3.00% HQLA Successful 26.90 26.91 Implementations 27.10 2.75% 2.50% NCO 16.40 22.20 26.80 2.00% 2.25% 2.00% LCR 164% 121% 101% 1.75% 1.75% 1.00% Liquidity Risk MAT Crisis Alert Indicator Limit 0.00% Jan Mar May July Sept Nov Liquidity Coverage 130% 100% Ratio (LCR) OPR Background As the news of the OPR increase spreads through the market in the upcoming months, wholesale customers begin to reconsider the structure of their deposits. Many of these wholesale customers, such as large corporations and financial institutions, are highly sensitive to changes in interest rates. In anticipation of higher returns from short-term instruments following the rate hike, they decide to move their deposits from longer-term instruments (such as 6-month and 12-month deposits) into short-dated deposits, typically with maturities of less than 30 days. This shift in deposit behavior is triggered by the expected higher returns from short-term instruments, which are considered more attractive after the OPR increase. Due to the customer behavior the Bank LCR already decrease since Oct and expected to decrease for the upcoming month due to potential further OPR hike. Based on the information provided above, CEO has invoked the LCFP due to the indicator is reaching the crisis alert limit. Form LMC to handle the potential crisis, What are the necessary escalation and mitigation actions that need to be taken? 39  Test Case 3 continue The Event A viral post on social media made allegations about the Bank exposure to a risky financing's portfolio. The post, which spread rapidly across platforms like Twitter, Facebook, and Instagram, claimed that the Bank had made Successful Implementations high-risk financing to unstable industries. Although the post was factually inaccurate and based on incomplete information, it quickly fueled public concern. On top of the Bank LCR is reaching to crisis alert limit there is false rumor allegations about the Bank exposure to a risky financing's portfolio thus further hampered the Bank’ Liquidity position. With retail customer already starting withdraw their deposits with total of RM2.0Bil for the past 1week. With the current news please create the communication action plan on top off current mitigation plan. 40  Key lesson learn from Liquidity Contingency Funding Plan 01 02 03 04 The Importance of Diversify Funding Clear Governance & Preparation Flexibility & Sources Communication Adaptability  Prepare for diverse  Avoid reliance on a  Governance and  Review and update stress scenarios single source; have Decision-Making the plan regularly; be (market, economic, multiple funding Framework. prepared to adjust counterparty options (interbank  Escalation strategies quickly in defaults). deposits, cash line, Procedures. response to market  Regularly test plans BNM lender of last  Transparent changes. to ensure readiness resort, etc.) Communication and Internal Communication 41 Confidential  06 Your Bank of Choice PART Q & A Session  Your Bank of Choice Thanks