CENTRAL BANK OF BAHRAIN
Second Consultation paper on Liquidity
Risk Management for Conventional Bank
Licensees
27th July 2010
(Deadline for comments: 30th September 2010)
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Second Consultation paper on Liquidity Risk
Management for Conventional Bank Licensees
STRUCTURE
 Executive Summary of the second Consultation on Liquidity Risk
Management for Conventional bank licensees
1.
2.
3.
4.
5.
6.
7.
Introduction:
Scope of the Proposed Consultation Paper:
Prudential liquidity ratio requirements (Section 3):
Role of Board of Directors/ Senior Management and ALCO (Section 4):
Liquidity management strategy, policies and procedures(Section 4.3):
Cash flow management and reporting (Section 5):
Asset and liability management (Section 6):
 Detailed second consultation on Liquidity Risk Management for
Conventional bank licensees
1. Introduction
1.1 Background
1.2 Scope
1.3 Implementation
2. Supervisory approach to liquidity risk
2.1 Objectives and principles
2.2 Supervisory process
2.3 Factors to be considered
3. Prudential liquidity ratio requirements
3.1 Minimum liquidity ratio
3.2 Computation of liquidity ratio
3.3 Back-to-back transactions
3.4 Monitoring of liquidity ratio
4. Liquidity management framework
4.1 Board and senior management oversight
4.2 Liquidity management structure
4.3 Liquidity management strategy, policies and procedures
4.4 Management information systems
4.5 Independent reviews and audits
5. Cash-flow management and reporting
5.1 Overview
5.2 Net funding requirements
5.3 Stress-testing and scenario analysis
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5.4 Foreign currency liquidity management
5.5 Supervisory and reporting arrangements
6. Asset and liability management
6.1 Liquid asset holdings
6.2 Diversification and stability of liabilities
6.3 Access to interbank and other wholesale markets
6.4 Intra-group liquidity
6.5 Intraday liquidity
6.6 Liquidity ratios and limits
7. Contingency plan
7.1 Overview
7.2 Early warning indicators
7.3 Strategy and procedures
7.4 Media relationship and public disclosure
Annex A: Correlation of liquidity risk with other risks
Annex B: Examples of scenario analysis
Annex C: Behavioural assumptions for cash-flow management
Annex D: Examples of liquidity ratios and limits
Annex E: The monthly Return of Liquidity Position of Conventional banks licensees
(form-1)& the related completion instructions
Annex F: The quarterly Return on Selected Data for Liquidity Stress-Testing (Form-2) &
the related completion instructions
Annex G: Mismatch Reporting
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Executive Summary of the second consultation on Liquidity Risk
Management for Conventional bank licensees.
1. Introduction:
This Consultation Paper sets out CBB’s proposals and views on the future of liquidity
regulation within the Kingdom of Bahrain. Ensuring that conventional bank licensees deliver
high standards of liquidity risk management is of paramount importance, not only to
minimize the possibility of conventional bank licensees failures but also to help the CBB
achieve its broad statutory objectives of market confidence and financial stability. The
proposals incorporate recently agreed standards for liquidity set by the Basel Committee
(Principles for Sound Liquidity Risk and Management – September 2008). They also take on
board what has been learnt from the difficulties faced by financial institutions over the last
year, as well as from the CBB’s supervisory counterparts in other jurisdictions. Most issues
are addressed in greater detail throughout the proposed consultation paper; however, this
paper outlines them upfront to set the scene. The consultation paper attempts to be sensitive
to all different components in conventional bank licensees’ businesses that contribute
significantly to liquidity risk. Many institutions will need to significantly reshape their
business models over the next few years to accommodate the new standards.
2. Scope of the Proposed Consultation Paper:



The paper sets out CBB’s proposed supervisory approach to liquidity risk, including the
principles and factors to be considered for evaluating the adequacy and effectiveness of a
conventional bank licensees’ liquidity risk management;
It highlights the proposed prudential requirements in relation to liquidity risk and the
manner in which CBB intends to monitors compliance with these requirements; and
It provides guidance to conventional bank licensees on the key elements of a sound
liquidity risk management process.
3. Prudential liquidity ratio requirements (Section 3):
The CBB proposes to implement a new quantitative regime for conventional bank licensees
to anchor the stability of their liquidity positions. The proposed consultation paper states the
need for conventional bank licensees to exceed the minimum prudential stock liquidity ratio
requirement of 25%. Other proposed statutory liquidity ratio requirements include mismatch
ratios and a loans to deposits ratio.
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4. Role of Board of Directors/ Senior Management and ALCO (Section 4):
A conventional bank licensee’s board of directors should review and approve the structure,
strategy, policies and practices related to the management of liquidity (including contingency
planning) at least annually, and also should ensure that senior management manages and
monitors liquidity risk effectively. Senior management should continuously review
information on the conventional bank licensees’ liquidity developments and report to the
board of directors on an annual basis. An example of a liquidity management structure is
provided, using an Asset and Liabilities Committee (ALCO). For ALCO to function
effectively, it should comprise personnel from senior management, treasury function, risk
management and other business areas that could affect liquidity risk. Diagram 1 classifies the
roles and responsibilities of liquidity management.
5. Liquidity management strategy, policies and procedures(Sub-section 4.3):
Every conventional bank licensee will be required to formulate a statement of its liquidity
management policies that will be reviewed and discussed by the CBB with the objective of
agreeing minimum liquidity standards for them. The policy statement must be properly
documented, reviewed annually and approved by the Board of Directors to ensure that it
remains valid under changing circumstances. While specific details of the policy statement
will differ; it must at least cover the liquidity management strategy, responsibilities, systems
and contingency planning.
6. Cash flow management and reporting (Section 5):
Conventional bank licensees are required to develop an effective Liquidity Risk Management
Framework. A primary objective of the Liquidity Risk Management Framework should be to
ensure with a high degree of confidence that the conventional bank licensee is in a position to
both address its daily liquidity obligations and withstand a period of liquidity stress affecting
both secured and unsecured funding, the source of which could be institution-specific crisis
or general market crisis. A conventional bank licensee should be able to measure and forecast
its expected cash flows for assets, liabilities and off-balance sheet commitments over a
variety of time horizons, under normal conditions and a range of stress scenarios, including
scenarios of severe stress.
7. Asset and liability management (Section 6):
To ensure that there are no undue risks of conventional bank licensees not being able to meet
their liabilities as they fall due, conventional bank licensees are required to maintain an
appropriate mix of high quality liquid assets. Section 6 further discusses liquid assets,
including the type and quality of assets to be held for liquidity purposes and the level of such
holdings. The amount and composition of such assets should be determined by individual
conventional bank licensees with reference to the nature of their business and liquidity risk
profile. Concentration limits should also be established where appropriate to avoid excessive
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exposure to market and other risks within the assets portfolios in respect of asset type,
counterparty, geographic location and economic sector.
8. Contingency Plan (Section 7):
Finally, this section outlines an overall requirement for conventional bank licensees to have
in place a formal contingency plan that clearly sets out the strategies for addressing liquidity
shortfalls in emergency situations. The results of stress tests should also play a key role in
shaping the conventional bank licensees’ contingency planning and in determining the
strategy and tactics to deal with events of liquidity stress. As a result, stress testing and
contingency planning are closely intertwined. In addition, this section elaborates on the
importance of public disclosure. A conventional bank licensee should publicly disclose
information on a regular basis that enables market participants to make an informed
judgment about the soundness of its liquidity risk management framework and liquidity
position.
9. Appendices:
At the end of the proposed consultation paper, 4 appendices are provided to further explain
and supplement sections in the paper including correlation of liquidity risk with other risks,
examples of scenario analysis, behavioral assumptions for cash-flow management and
examples of liquidity ratios and limits. Three additional appendices show the draft forms that
will be used for prudential and mismatch reporting purposes.
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 Detailed second consultation on Liquidity Risk Management for
Conventional bank licensees
1. Introduction
1.1 Background
1.1.1 Liquidity as defined by the Basel Committee is ―the ability of a conventional bank licensee
to fund increases in assets and meet obligations as they come due without incurring unacceptable
losses‖. In September 2008, the Basel Committee released a comprehensive and updated paper
on liquidity. This Consultation Paper draws on certain requirements in the Basel Paper and in
Basel Core Principle 14 to outline proposals for a new set of prudential standards in liquidity for
conventional bank licensees licensed by the CBB to follow. These standards include the need for
conventional bank licensees to:
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
Maintain adequate liquidity to meet obligations as they will or may fall due; and
Observe any supervisory liquidity ratios required by Rulebook provisions (the Rulebook).
1.1.2 Failure by a conventional bank licensee to be compliant with the CBB liquidity ratios or
adhere to the principles and standards set by the CBB in this paper may call into question
whether the conventional bank licensee continues to satisfy its authorization criteria. Section 2 of
this Paper indicates the supervisory approach that CBB proposes to adopt in respect of these
cases, including the actions that may be taken. Appendixes E and F demonstrates the monthly
Return of Liquidity Position of Conventional banks licensees (form-1), the quarterly Return on
Selected Data for Liquidity Stress-Testing (Form-2) respectively and the related completion
instructions.
1.2 Scope
1.2.1 This paper:



sets out CBB’s proposed supervisory approach to liquidity risk, including the principles
and factors to be considered for evaluating the adequacy and effectiveness of a
conventional bank licensees’ liquidity risk management;
sets out in Section 3 the proposed prudential requirements (i.e. quantitative limits) in
relation to liquidity risk and the manner in which CBB intends to monitors compliance
with these requirements; and
provides guidance in Section 6 to conventional bank licensees on the key elements of a
sound liquidity risk management process.
1.2.2 In developing this paper, CBB has had regard to the following:
 the Basel Committee paper entitled ―Principles for Sound Liquidity Risk Management
and Supervision‖ (2008);
 Principle 14 of the ―Core Principles for Effective Banking Supervision‖ covering
conventional bank licensees’ risk management processes for controlling other material
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
risks (including liquidity risk) (the relevant information is contained in the Basel
Committee paper on ―Core Principles Methodology‖ (2006); and
the liquidity risk management practices currently adopted by some international
conventional bank licensees.
1.3 Implementation
1.3.1 CBB recognises that some conventional bank licensees may need time to develop / enhance
their internal systems necessary to comply with the proposed requirements of this Paper.
However, conventional bank licensees are expected to accord priority to ensuring adequate
liquidity and be ready to submit the monthly report on liquidity position and quarterly return on
liquidity stress-testing within one year of the issue date of this paper. The CBB will monitor the
progress of the conventional bank licensees in enhancing their systems and procedures to meet
the remaining requirements (e.g. the cash-flow and scenario analyses, etc.) within a reasonable
timeframe.
2. Supervisory approach to liquidity risk
2.1 Objectives and principles
2.1.1 Every conventional bank licensee is required to maintain adequate liquidity (including the
compliance with prudential liquidity requirements).
2.1.2 A key objective of the CBB in respect of liquidity management is to ensure that
conventional bank licensees can satisfy the above requirement on a continuing basis. This
relates, in particular, to a conventional bank licensees’ ability to:


meet its obligations as and when they fall due; and
maintain a sufficient stock of high quality liquid assets to cater for a funding crisis.
2.1.3 In supervising liquidity risk, the CBB proposes to adopt a system-based approach that
focuses on the processes and controls established by conventional bank licensees. Prudent
management of liquidity, through the institution of proper strategies, systems and controls, is the
primary responsibility of the senior management of conventional bank licensees under authority
and limits approved by the Board. Management is expected to put in place adequate risk
management systems to identify, measure, monitor and control liquidity risk. The sophistication
of these systems should reflect the nature, size and complexity of a conventional bank licensees’
activities.
2.1.4 Central to effective liquidity risk management is a conventional bank licensees’ ability to
maintain adequate liquidity in the event of a funding crisis. The CBB will assess this ability in
respect of:
 the amount of high quality liquid assets that the conventional bank licensee can readily
dispose of or pledge for funding(see paragraph 3.2.3 and Appendix E);
 the results of stress tests carried out by the conventional bank licensee on its cash-flow
and liquidity positions under different scenarios. CBB may, where appropriate, conduct
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across-the-board stress tests to evaluate individual conventional bank licensees’ ability to
weather a liquidity crisis(see Appendix F); and
the stability of the conventional bank licensees’ funding sources and its contingency
measures for dealing with crisis situations.
These issues are further discussed in sections 3 and 5 to 7.
2.1.5 Every conventional bank licensee is required to document in a policy statement its policies
and strategies for managing liquidity risk, including how it identifies, measures, monitors and
controls that risk. This policy statement should be prepared in sufficient detail, and cover various
factors described in subsection 2.3. It must be approved by the Board of Directors and agreed
with CBB. See subsection 4.3 below for more guidance.
2.1.6 In assessing the overall adequacy of liquidity of Bahrain branches of foreign conventional
bank licensees or Bahrain-based subsidiaries of conventional bank licensees incorporated
outside Bahrain, CBB will take account of the global liquidity risk management policies of the
head office or parent conventional bank licensee and the extent to which liquidity is supervised
by the home authority.
2.2 Supervisory process
2.2.1 CBB proposes to adopt a risk-based supervisory approach that includes continuous
supervision of conventional bank licensees’ liquidity risk through a combination of risk-focused
on-site examinations, off-site reviews and prudential meetings. The objectives are to obtain
sufficient and timely information for evaluation of conventional bank licensees’ liquidity risk
profile and to assess the adequacy and effectiveness of their liquidity risk management process.
2.2.2 CBB will review conventional bank licensees’ liquidity management policy statements to
assess the adequacy of their risk management strategies and policies. It will also conduct off-site
analysis to monitor the level and trends of conventional bank licensees’ liquidity positions
through their regular submission of the following statistical returns and management
information:
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

the monthly ―Return on Liquidity Position –(―Liquidity Return‖) – to monitor
conventional bank licensees’ compliance with the prudential requirements on the
minimum stock liquidity ratio and analyse other information on liquefiable assets and
funding sources (see paragraphs 3.4.1 and 3.4.2 and Appendix E below for more details);
the quarterly ―Return on Selected Data for Liquidity Stress-testing‖ (―Liquidity Stresstesting Return‖) (only applicable to locally incorporated conventional bank licensees) –
to enable CBB to conduct across-the-board stress tests on individual conventional bank
licensees’ liquidity risk (see para. 5.5.6 and Appendix F below for more details); and
the cash-flow and scenario analyses conducted by conventional bank licensees (based on
their internal management reports submitted on a quarterly basis) – to analyse
conventional bank licensees’ ability to maintain adequate liquidity under normal and
stressed conditions (see section 5 and Annex B below for more guidance).
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2.2.3 Where necessary, the CBB may request individual conventional bank licensees to provide
additional information on their liquidity positions. For example, conventional bank licensees
with significant foreign exchange business will be required to submit separate scenario analyses
on their foreign currency positions.
2.2.4 The CBB currently monitors the liquidity risk profile of conventional bank licensees during
off-site reviews and evaluates the effectiveness of their liquidity risk management systems
during on-site examinations. These current procedures will be enhanced. If a conventional bank
licensee demonstrates one or more of the following weaknesses, this may call into question
whether the conventional bank licensee continues to satisfy the minimum authorization criterion
for adequate liquidity:
 failure to meet the prudential minimum liquidity ratios or honour obligations as they
fall due;
 insufficient liquidity to meet crisis or emergency situations;
 evidence of imprudent management of liquidity (such as serious or persistent breaches of
the conventional bank licensees’ own liquidity policies, excessively large mismatches,
difficulty in obtaining external funding and undue reliance on high cost funds); and
 other significant deficiencies in the internal systems and controls for identifying and
measuring liquidity risk (e.g. material reporting errors and omissions).
2.2.5 CBB will normally enter into discussions with the conventional bank licensee concerned
and seek prompt remedial action. If such remedial action is not possible, it may be necessary to
consider whether CBB’s powers to restrict the activities of the conventional bank licensee or
revoke the conventional bank licensees’ license should be exercised. In determining whether
such a step should be taken, CBB would have primary regard to the need to maintain the stability
of the banking system.
2.2.6 Depending on the circumstances of each case, CBB may also consider taking other
supervisory measures. For example, CBB may set a minimum stock liquidity ratio in excess of
25% (see Section 3.1 for more details) for the conventional bank licensee concerned if there is
doubt about its liquidity profile. It may also require the conventional bank licensee to reposition
its asset portfolios to reduce liquidity risk.
2.3 Factors to be considered
2.3.1 In assessing a conventional bank licensee’s liquidity risk profile and the adequacy of its
liquidity risk management process, CBB will have particular regard to the following factors:
 the level and trend of the conventional bank licensee’s prudential liquidity ratios as well
as the quality and composition of its liquid assets to withstand a liquidity crisis (see
section 3 and subsection 6.1 below for more guidance);
 the adequacy of the conventional bank licensee’s liquidity risk management
framework, including the level of oversight exercised by the Board and senior
management and the propriety of its liquidity management policies and reporting
systems (see section 4 below for more guidance);
 staff knowledge and expertise in identifying and managing sources of liquidity risk;
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the ability of the conventional bank licensee to measure, monitor and control cash-flow
positions under both normal and stress scenarios and for the management of liquidity in
foreign currencies in which it has significant positions (see section 5 below for more
guidance);
the funding capacity of the conventional bank licensee in both normal and crisis
situations, including its ability to borrow in the interbank and wholesale markets, the
diversification and volatility of its deposit base and the availability and reliability of
standby facilities and intra-group funding (see subsections 6.2 to 6.5 below for more
guidance);
the adequacy and effectiveness of the conventional bank licensee’s internal risk tolerance
limits and ratios for managing liquidity (see subsection 6.6 below for more guidance);
and
the adequacy of the conventional bank licensee’s contingency planning for a liquidity
crisis, including such aspects as warning signs of an approaching crisis, emergency
funding sources and the actions that would be taken to pre-empt it (see section 7 below
for more guidance).
2.3.2 In considering whether a conventional bank licensee has appropriate systems for managing
liquidity risk, the CBB will also take into account the nature and complexity of its business and,
in addition, its compliance with the standards and sound practices set out elsewhere in the
Rulebook.
3. Prudential liquidity ratio requirements
3.1 Minimum stock liquidity ratio
3.1.1 This subsection summarises key provisions in relation to the prudential liquidity ratio
requirements for conventional bank licensees.
3.1.2 Conventional bank licensees will be required to maintain, an average stock liquidity
ratio of not less than 25% in each calendar month.
3.1.3 The liquidity ratio of a conventional bank licensee, whether incorporated in or outside
Bahrain, will apply only to its principal place of business in Bahrain and local branches (i.e.
excluding any subsidiary or overseas branch of the conventional bank licensee).
3.1.4 The CBB may, by notice in writing, require the stock liquidity ratio of a locally
incorporated conventional bank licensee to be calculated:


on a consolidated basis instead of an unconsolidated basis; or
on both a consolidated and an unconsolidated basis.
3.1.5 If the stock liquidity ratio is to be calculated on a consolidated basis, the CBB may require
that the ratio be applied only in respect of certain subsidiaries or overseas branches as specified.
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3.1.6 The following are some examples of the situations when the CBB may require
consolidation of the liquidity positions of selected deposit-taking subsidiaries or overseas
branches of a conventional bank licensee:
 when, in the case of a locally incorporated parent conventional bank licensee, there are
material back-to-back transactions (see also subsection 3.3 below) between the parent
conventional bank licensee and its authorized subsidiary;
 when the Bahrain operation of the conventional bank licensee concerned deploys a
significant part of its surplus liquidity through some subsidiaries or overseas branches;
and
 when a significant amount of deposits is booked with some subsidiaries or overseas
branches.
3.1.7 Conventional bank licensees will be required to notify CBB by accompanying letter of
any non-compliance with the monthly average stock liquidity ratio and provide CBB with
the reasons for non-compliance with the required 25% average ratio. Furthermore, the
conventional bank licensees will be required to report separately for each day where the
liquidity ratio at the close of business is below 25%.
3.1.8 CBB will enter into discussions with the conventional bank licensee concerned to
determine what remedial action is required to be taken where the average stock liquidity ratio is
below 25%. After holding such discussions, CBB may issue a notice in writing to the
conventional bank licensee specifying the remedial action that it should take.
3.1.9 Any director, chief executive or manager (whose responsibility relates to liquidity risk
monitoring or management) of a conventional bank licensee that fails to notify CBB of noncompliance or to take the remedial action specified by CBB will be subject to the enforcement
provisions of Module EN of the CBB Rulebook.
3.1.10 CBB is empowered to vary the minimum stock liquidity ratio applicable to any individual
conventional bank licensee. This power may be exercised to increase the minimum stock
liquidity ratio of a conventional bank licensee if there is doubt about the adequacy of the
conventional bank licensee’s liquidity, having regard to the factors set out in subsection 2.3
above and the conventional bank licensee’s financial position.
3.1.11 If CBB varies the minimum liquidity ratios of any conventional bank licensee, it will
provide the conventional bank licensee with the relevant particulars of such variation.
3.2 Computation of liquidity ratios
3.2.1 For completion of the Monthly ―Return on Liquidity Position‖ , instructions will be
provided which will set out the rules and requirements for conventional bank licensees to
compute the liquidity ratios as well as the definitions of liquefiable assets and qualifying
liabilities (see Appendix E).
3.2.2. The stock liquidity ratio for a given calendar month should be calculated as the ratio of the
sum of a conventional bank licensee’s liquefiable assets, net of deductions required by CBB, to
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the sum of its qualifying liabilities for each working day of that month, expressed as a
percentage.
3.2.3 Liquefiable assets, comprise the following categories( see Appendix E):
 currency notes and coins;
 gold;
 the excess of one month interbank assets over one month interbank liabilities (i.e. if
interbank placements of one month maturity or less are $ 170m and one month or less
liabilities to conventional bank licensees are $ 120m, the excess would be $ 50m);
 prescribed instruments (exchange traded and listed) Bahrain T-bills, GCC Government
bonds and other US$ denominated sovereign bonds and bills up to one year maturity AArating and above;
 eligible loan repayments3
3.2.4 Certain items of liquefiable assets mentioned above will each be assigned a liquidity
conversion factor (―LCF‖) to reflect differences in terms of credit risk, market risk and
convertibility into cash. The weighted amount of each liquefiable asset, calculated by
multiplying the principal amount of the asset by the relevant LCF, will be used for the purposes
of calculating the total amount of liquefiable assets to be included in the liquidity ratio.
3.2.5 Each liquefiable asset must also meet the following requirements:
 it must not be overdue;
 it must be free from encumbrances;


it must be freely remittable and payable to the conventional bank licensee concerned; and
it must be denominated in Bahraini Dinars, or in a GCC currency, or US$.
3.2.6 Unless otherwise agreed by CBB, any equity or any debt security or prescribed instrument
with a residual maturity of within one month which is issued by the concerned conventional bank
licensee, with a LCF of 100%, should be deducted from its liquefiable assets. CBB may also
exclude from the liquefiable assets of a conventional bank licensee any transaction that is, in his
opinion, not capable of producing genuine liquidity.
3.2.7 The total amount of qualifying liabilities is the sum of:
 the excess of one month interbank liabilities over one month interbank assets (i.e. if
interbank liabilities of one month maturity or less are $ 250m and one month or less
interbank assets are $ 210m, the excess would be $40m);
 the total of its other one-month liabilities.
1 The
term ―one-month liability‖, in relation to any conventional bank licensee or relevant bank, means:
(i) any liability, other than a contingent liability, the effect of which will or could be to reduce within one month the liq uefiable
assets of that conventional bank licensee or relevant bank; and
(ii) any contingent liability that in CBB’s opinion may result in a reduction within one month of the liquefiable assets of t hat
conventional bank licensee.
2 A relevant bank includes: (i) any conventional bank licensee (other than one whose authorization is suspended); (ii) any
conventional bank license incorporated outside Bahrain which is not a conventional bank licensee (except one which, in the
opinion of CBB, is not adequately supervised or whose authorization is suspended);
3 These are payments/ instalments falling due within one calendar month which are not currently in default and the conventional
bank licensee has no reason to expect default on the next payment/ instalment.
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3.2.8 Irrevocable commitments to provide funds within one month should be included in the
reporting of other one month liabilities. These include:
 facilities with a known date of drawdown within one month; and
 facilities without known date of drawdown but the drawdown carries a notice period of
within one month (including where the drawdown is on demand i.e. requiring no notice
period) except where conditions attached to the drawdown cannot in practice be met
within one month. These conditions may include the execution of security documentation
and the completion of a certain phase of a project etc.
3.2.9 The following are excluded from the reporting of qualifying liabilities:
 potential commitments relating to overdraft and credit card facilities, which may be
cancelled at any time and
 contingent liabilities arising from trade-related contingencies and financial derivatives
contracts i.e. interest rate, foreign exchange, equity, precious metal and commodity
contracts.
3.2.10 A deposit which has been pledged with a conventional bank licensee for securing a loan
granted to a non-bank customer should also be excluded from the calculation of qualifying
liabilities to the extent of the outstanding balance of the loan.
3.3 Intragroup back-to-back transactions
3.3.1 The CBB is concerned that conventional bank licensees which are part of a financial
conglomerate may become over-reliant on intragroup financing or may provide such financing to
group members whilst depending on the wholesale market or short term facilities to cover such
positions. Intragroup back-to-back transactions for the purpose of this paper refer to interoffice
or intragroup transactions which typically involve two legs, one borrowing long (with maturity
of more than one month) and the other lending short (with maturity of one month or less). Both
legs are for the same or similar amount and at the same or similar rate of interest and are, in most
cases, rolled forward continuously.
3.3.2 CBB may approve the local branch or authorized subsidiary of some international
conventional bank licensees to include claims under intragroup back-to-back transactions as
liquefiable assets in the computation of the stock liquidity ratio mainly on the basis of the
following conditions:
 the foreign conventional bank licensee is an international bank whose liquidity is
managed, and supervised, on an integrated global basis;
 the transactions are carried out with the head office or parent bank (transactions with
sister branches or fellow subsidiaries outside Bahrain are not allowed);
 there is no doubt about the liquidity of the head office or parent bank. The CBB will
need some form of LOC from parent, and this LOC will need to be confirmed with the
concerned supervisor;
 the head office or parent bank has confirmed, in terms acceptable to CBB, that the effect
of the transactions is to provide genuine liquidity to the branch or subsidiary concerned
even in the event of funding difficulties affecting the conventional bank licensee or
banking group as a whole; and
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
in the case of transactions or intra-group transactions of material size5, the home
supervisor has confirmed to CBB that it is aware of the transactions and their purpose and
has no objection to them.
3.3.3 In each approved case, a limit has been agreed with the conventional bank licensee
concerned to control the extent to which intragroup back-to-back claims can be recognised as
liquefiable assets.
3.3.4 As intragroup back-to-back transactions sometimes may not involve the actual movement
of funds and rely to a great extent on the liquidity support of the head office or parent bank, CBB
may grant such approvals only in a limited number of cases. In view of the increasing focus on a
cash-flow management approach to liquidity risk, however, it is considered that the use of such
transactions for liquidity purposes should be minimised.
3.3.5 CBB’s general policy is therefore not to allow conventional bank licensees to use
intragroup back-to-back transactions for the purpose of calculating the stock liquidity
ratio.
3.3.6 CBB will from time to time review the use of intragroup back-to-back transactions by these
conventional bank licensees and their compliance with the conditions for approval, and consider
whether the limits approved for such transactions are still appropriate or necessary.
3.4 Monitoring of stock liquidity ratio
3.4.1 CBB will make use of the Liquidity Return and various ratios (e.g. target stock liquidity
ratio and lowest daily stock liquidity ratio) to facilitate its review of the level and trends of
conventional bank licensees’ stock liquidity ratios and ensure their compliance with prudential
requirements.
3.4.2 Conventional bank licensees will be required to submit the Liquidity Return on a monthly
basis. The return collects information on the following:
 month-end stock liquidity ratio;
 month-end cumulative mismatch ratios for the relevant periods;
 month-end Loans to Deposits ratio;
 composition of liquefiable assets and qualifying liabilities;
 average stock liquidity ratio and daily stock liquidity ratios which are below 25% or the
lowest daily stock ratio if all daily stock ratios are 25% or greater during the month; and
 other supplementary information on –
- interoffice or intra-group (back-to-back) transactions;
- deposits from connected customers;
- irrevocable standby facilities and large customer deposits and conventional bank
licensee borrowings; and
- foreign currency assets and liabilities maturing within three months.
5 As
a general rule, back-to-back transactions will be regarded as material if the liquidity ratio of the bank would drop below 30%
after excluding such transactions from the calculation of the ratio.
15
3.4.3 Conventional bank licensees will be required to set a target stock liquidity ratio at a
level above the prudential minimum so as to provide a warning signal to the management.
This ratio will be particularly useful for conventional bank licensees that engage in retail
business as they are more vulnerable to depositor withdrawals in a liquidity crisis and those
conventional bank licensees which normally maintain a stock liquidity ratio relatively close to
the prudential minimum. The actual positions of the stock liquidity ratio should be compared
with the target and any breaches and the follow-up actions taken by the management to restore
the stock liquidity ratio should be properly documented. CBB will request conventional bank
licensees to give an explanation if their stock liquidity ratio consistently falls below the target
ratio.
3.4.4 While the minimum and target stock liquidity ratios refer to the average positions within a
calendar month, conventional bank licensees must aim to maintain adequate liquidity on a daily
basis and avoid significant negative differences between the daily and average ratios during the
month.
3.4.5 CBB will hold discussions with conventional bank licensees with lowest daily stock
liquidity ratios that are significantly or consistently below 25% to ascertain whether they are
adopting prudent liquidity policies on a day-to-day basis.
3.5 The maturity mismatch approach
3.5.1 The mismatch approach measures a conventional bank licensees’ liquidity by assessing the
mismatch between its cash inflows (assets) and cash outflows (liabilities) within different time
bands on a maturity ladder.
a) The extent of the difference between the receipts from cash inflows (assets) and cash
outflows (liabilities) is termed a mismatch. A positive mismatch exists where the
(expected) inflow of cash from assets exceeds the (expected) outflow of funds to repay /
cover liabilities. A negative mismatch exists where the (expected) inflow of cash from
assets is less than the (expected) outflow of funds to repay / cover liabilities. Mismatches
are measured in cash amounts.
b) In the maturity ladder, inflows (assets) and outflows (liabilities) are slotted into time
bands (for example, sight, sight to 8 days, and sight to one month). Maturity is
determined on a worst-case view, i.e. inflows (assets) are put in at their latest maturity
and outflows (liabilities) at their earliest maturity. This approach is adopted to assess a
conventional bank licensees’ liquidity when its funding sources are unwilling to lend and
its depositors withdraw their money.
c) The information provided in the maturity ladder is assessed in cumulative time bands,
as mentioned above, of sight - 8 days, sight - 1 month, sight – 3 months, etc. Items such
as liquefiable assets may be inserted into certain time bands (subject to haircuts or
adjustments) to reflect their ability to provide cash if sold or repoed. Behavioural
adjustments may also be permitted for certain ―stable‖ funds or for undrawn credit
16
facilities. The precise mechanisms for calculating the mismatch ratios for different
periods are located in section H of the PIR form.
3.5.2 A net mismatch figure is obtained by subtracting outflows (liabilities) from inflows (assets)
in each time band. Mismatches are then measured on a net cumulative basis.
3.5.3 A mismatch ratio is then calculated by expressing the cash mismatch amount (positive/
negative) as a percentage of deposit liabilities.
3.5.4 The proposed Regulatory Mismatch ratio is the negative cumulative maturity mismatch
position/ total deposits. These ratios will be assessed on an aggregate basis, for base currency
and other major currencies in which the bank is active on a cumulative basis.
3.5.6 All conventional bank licensees will be required to ensure that their cumulative
negative mismatch ratios (as a percentage of total deposits) do not exceed 10% for the one
week band and 15% for the one month band.
3.5.7 Wholesale conventional bank licensees will additionally be required to ensure that
their cumulative negative mismatch ratios (as a percentage of total deposits) do not exceed
20% for the three months band and 25% for the 6 months band.
3.5.8 A draft form for the reporting of these ratios is attached at Annex G. The report would be
on a monthly basis (at month end). The concerned bank must also provide a report for each day
in any given month when any of the prudential mismatch ratios is not complied with.
Conventional bank licensees which consistently fail to meet the ratios mentioned above (3.5.6
and 3.5.7), will be required to report their liquidity positions on a weekly basis. Conventional
bank licensees will be questioned and investigated where such breaches of the ratios occur more
than three times within a given month.
3.5.9 Conventional bank licensees may apply to the CBB for approval to make behavioural
adjustments to their deposits with original maturities of 3 months or less. Such applications must be
based on at least two years of supporting data, and supported by a report from their external auditors
verifying the supporting data used to justify the behavioural adjustments proposed.
3.6 Net Loans to total deposits ratio
3.6.1 The net loans to total deposits1 ratio measures the extent to which deposits have been used
to fund the loans. The net loans to total deposits ratio accounts for on-balance sheet items (i.e.
withdrawn commitments) and does not account for off balance sheet items such as undrawn
commitments, LCs, guarantees etc. This ratio shall not take into account interbank credit
exposures and deposit funds. A high ratio indicates an over-lent position.
3.6.2 Retail conventional bank licensees will not be allowed to exceed a net loans to total
deposits ratio of 80%. A higher ratio may indicate a potential liquidity problem in case a
1 Deposits are defined in accordance with Resolution No. [23] of 2009 in respect of Definition of Deposit .
17
large amount of deposits are unexpectedly withdrawn, or a default occurs in one or more
large credit exposures leading to a loss of significant cash inflow.
3.6.3 Wholesale conventional bank licensees with substantial loan books are subject to the
maximum loans to deposits ratio on a case by case basis. Wholesale banks with small loan
books relative to their total asset base will not be subject to the maximum loans to deposit
ratio.
3.6.4 A high ratio normally indicates a less liquid, risk oriented conventional bank licensee. A
higher ratio may be allowed in case of branches of foreign conventional bank licensees in
Bahrain, provided that the CBB is satisfied, through a home supervisor confirmation, that the
parent conventional bank licensee has a satisfactory and robust liquidity risk management system
that takes into account the liquidity profile of the branch.
4. Liquidity management framework
4.1 Board and senior management oversight
4.1.1 Effective liquidity risk management requires an informed Board, capable management and
appropriate staffing.
The Board of Directors is, in particular, responsible for:
 approving a conventional bank licensee’s liquidity risk strategy and other significant
policies related to liquidity risk management (including contingency planning on an
annual basis);
 ensuring that an appropriate liquidity risk management structure, which identifies the
lines of authority and responsibilities for different levels of management, is established
and is reviewed by the Board on at least an annual basis;
 maintaining continued awareness of a conventional bank licensee’s performance and
overall liquidity risk profile through quarterly monitoring; and
 ensuring that liquidity risk is adequately managed and controlled by senior management
within the established risk management framework through annual review.
4.1.2 Senior management is responsible for overseeing the day-to-day and long-term
management of liquidity risk in line with the objectives and risk tolerance levels set by the Board
of Directors. This involves the development, implementation and maintenance of:
 appropriate policies procedures and internal limits that translate the Board’s approved
objectives and risk tolerances into operating standards;
 management information and other systems that adequately identify, measure, monitor
and control liquidity risk in respect of the above limits; and
 effective internal controls over the liquidity risk management process.
4.1.3 It is also important for senior management to have a thorough understanding of the nature
and level of liquidity risk assumed by a bank and the means to manage that risk. Senior
management should define the different forms of liquidity risk to which a conventional bank
18
licensee is exposed to. Managing liquidity risk involves understanding the characteristics and
risks of different sources of liquidity, determining the appropriate funding strategies (including
the mix of funding sources) to meet liquidity needs and
deploying the strategies in a cost-effective manner. Different sources of liquidity risk include the
following:

Asset liquidity:
The asset portfolio of a conventional bank licensee can provide liquidity in three
different ways, viz., through:
- the maturity of an asset;
- the sale of an asset; and
- the use of an asset as collateral for borrowing or
repo transactions.
Typically, conventional bank licensees hold liquid assets (e.g. money market
placements and marketable securities) to supplement other funding sources (e.g. deposits
and other liabilities). However, conventional bank licensees may incur liquidity risk
where inflows from the realisation of assets (either upon maturity or at the time of sale)
are less than anticipated because of default risk or price volatility. Secured funding,
including repos, may be similarly affected if counterparties seek better quality collateral
or larger discounts on collateral.
In addition, significant concentrations within the asset portfolio (e.g. in relation to the
distribution of exposures by counterparty, instrument type, geographical location or
economic sector) often increase the level of liquidity risk.
In managing asset liquidity, conventional bank licensees are expected to establish a clear
strategy for holding liquid assets, develop procedures for assessing the value,
marketability and liquidity of the asset holdings under different market conditions, and
determine the appropriate volume and mix of such holdings to avoid potential
concentrations (see subsection 6.1 below for more guidance).

Liability liquidity:
Conventional bank licensees may employ different liability funding strategies to manage
liquidity risk. Those with an extensive branch network would normally tap on relatively
low cost retail deposits as a major source of funding. Others that concentrate on
wholesale business activities may regard money market borrowings as the most
economical way to obtain short-term liquidity. Some conventional bank licensees may
secure term funding (e.g. by issuing medium-term certificates of deposit) or ensure a
spread of maturities for their liabilities to reduce liquidity risk.
Conventional bank licensees should develop a liability funding strategy that is
appropriate to the nature and scale of their activities, including the proper mix of
liabilities to avoid potential concentrations (e.g. arising from undue reliance on a single
fund provider or a closely related group of providers). See subsection 6.2 below for more
guidance.
19
In managing liability liquidity, conventional bank licensees should be able to distinguish
the characteristics of different funding sources and monitor their trends separately.
Wholesale funds, including deposits from large corporates and private banking clients,
are likely to be more sensitive to credit risk and interest rates than retail deposits. Internet
deposits and other deposits solicited at rates higher than market rates may also tend to be
more volatile.
Conventional bank licensees should also pay particular attention to the impact of
changing market conditions on their funding structure. For example, a sudden increase in
interest rates may squeeze the earnings of conventional bank licensees that fund their
long-term assets with short-term liabilities.

Off-balance sheet activities:
Off-balance sheet items, depending on the nature of transactions, can either supply or use
liquidity. Some examples of how such items will affect conventional bank licensees’
liquidity are described below.
Standby or committed facilities given by other financial institutions to conventional bank
licensees can provide them with funding in the case of need. However, conventional bank
licensees should monitor any covenants included in the facility agreement and, if
possible, regularly test access to the funds so as to consider the extent to which such
facilities can be relied upon under stressed conditions.
Loan commitments given by conventional bank licensees to their customers, on the other
hand, will draw on their liquidity. Conventional bank licensees should be able to estimate
and incorporate in their cash-flow projections the amount and timing of unused
commitments (including those arising from mortgage loans, retail overdrafts and credit
cards) that will possibly be drawn.
Derivatives, options and other contingent items pose more complexity for liquidity risk
management. The direction and amount of cash flows for such items will normally be
affected by market interest rates, exchange rates and other special terms under the
contract. Conventional bank licensees should estimate such cash flows with care, having
regard to the nature of individual transactions and market conditions. As an illustration, if
a conventional bank licensee pays a floating rate and receives a fixed rate in an interest
rate swap, it receives a payment for the difference of the two rates as long as the fixed
rate is higher than the floating rate. However, if interest rates increase and the floating
rate is subsequently above the fixed rate, the conventional bank licensees will pay the
difference of the two rates and incur a cash outflow instead.
Other types of off-balance sheet activities, such as credit derivatives, have also expanded
in use in recent years. The liquidity impact of these transactions may even be more
difficult to forecast. For instance, a conventional bank licensee undertakes, in return for a
premium, to compensate a counterparty for any of its credit losses covered under a credit
20
default swap. By selling credit protection, the conventional bank licensee concerned is
exposed to a contingent liability, the cash flow of which is not readily determinable.
Conventional bank licensees should ensure that they have the ability to assess how their
involvement in off-balance sheet activities (in particular unfunded derivatives and
commitments) would affect their cash flows and liquidity risk.
4.1.4 Given that maintenance of adequate liquidity is crucial for the ongoing viability of a bank,
senior management must promptly communicate any material changes in the bank’s current or
prospective liquidity position to the Board of Directors for advice and consideration.
4.2 Liquidity management structure
4.2.1 Conventional bank licensees must have in place a liquidity management structure that can
execute effectively their liquidity management strategy, policies and procedures.
4.2.2 The Board usually delegates the responsibility for managing the overall liquidity of a
conventional bank licensee to a senior management committee in the form of an Asset and
Liability Committee (―ALCO‖). For ALCO to function effectively, it should comprise personnel
from senior management, treasury function (responsible for day-to-day liquidity management),
risk management (responsible for day-to-day risk management e.g. credit/ market risk), other
control areas (if applicable) and other business areas (e.g. corporate loans) that could affect
liquidity risk.
4.2.3 Liquidity management may either be centralised or decentralised, or a combination of the
two may be adopted. The structure to be chosen depends on a conventional bank licensee’s size
and complexity of operations. Large conventional bank licensees or banking groups may tend to
have a more centralised structure in which liquidity for individual business units, including
branches and subsidiaries, is managed on a consolidated basis. In a decentralised structure,
business units within a conventional bank licensee or banking group would be responsible for
their own liquidity subject to limits imposed by senior management.
4.2.4 Diagram 1 provides an example of the liquidity management structure of an international
banking group. This example is not intended to be prescriptive, but provides an illustration of the
composition of an ALCO and how liquidity management responsibilities can be coordinated at
the group / regional, local and subsidiary level.
4.2.5 Where a conventional bank licensee is part of a banking group, its liquidity risk may be
managed on a group or sub-group basis. However, the conventional bank licensee remains
responsible for ensuring compliance at the conventional bank licensee level with the liquidity
standards and requirements of this module. There should be arrangements in place such that any
liquidity issues specific to the conventional bank licensee are identified and addressed by the
conventional bank licensee itself or by those delegated with the responsibility for managing the
conventional bank licensee’s liquidity risk.
21
Diagram 1: Illustration of the liquidity management structure of an international
banking group.
Board of
Directors
Intimately
responsible
for liquidity risk
management
ALCO (Group/
Audit Committee
Regional)
(Group/Regional)
Responsible for
overseeing
group/regional
liquidity risk
management
Responsible for
reviewing
Group / regional
audit reports
Local ALCO
Local Audit
Committee
Responsible for
overseeing
liquidity risk
management of
local operations
ALCO of
Subsidiaries
Responsible
for
monitoring
I
Treasury
I
Responsible for
reviewing
local audit
reports
I
Financial
Risk
Other
I
Compliance
liquidity
Responsible
Control
Management
Business Units
Responsible
risk of
subsidiaries
for
day-to-day
liquidity
management
Responsible
for
liquidity
risk reporting
Responsible
for day-to-day
risk
Management
(e.g. credit /
market risk)
Responsible
for compliance
with liquidity
positions,
procedures and
limits
for legal and
regulatory
compliance
22
4.2.6 Boards must regularly review the appropriateness of their liquidity management structure
(at least on an annual basis) in the light of business developments and changes.
4.3 Liquidity management strategy, policies and procedures
4.3.1 Every conventional bank licensee is required to formulate a statement of its liquidity
management policies. CBB will review and discuss the policy statement with individual
conventional bank licensees with the objective of agreeing minimum liquidity standards for
them. The policy statement must be properly documented and approved by the Board of
Directors, and be subject to regular review (at least annually) by the Board or ALCO to ensure
that it remains valid under changing circumstances. CBB must be notified of any material
changes to the policy statement.
4.3.2 While specific details of the policy statement will differ across conventional bank licensees
according to the nature of their business activities, it must cover, at a minimum, the following
key elements:
 Liquidity management strategy – which should set out the general approach to liquidity
(including goals and objectives) and specific policies on particular aspects of liquidity
risk management, such as - approved composition of assets and liabilities;
- approach to managing liquidity in different currencies;
- managing access to interbank and other wholesale markets;
- diversification and stability of liabilities; and
- management of intra-group liquidity;
 Liquidity management responsibilities – with clearly defined lines of authority,
responsibilities and reporting structure for liquidity risk management;
 Liquidity management systems – use of systems and tools for measuring, monitoring,
controlling and reporting liquidity, including –
- the setting of various risk tolerance limits and ratios (e.g. target liquidity ratio,
maturity mismatch limits, loan to deposit ratio etc.);
- the framework for conducting cash-flow analysis under normal and stress
scenarios, including the techniques and behavioural assumptions used; and
- the management reporting system for liquidity risk; and
 Contingency plan – which should describe the approach and strategies for dealing with
various types of liquidity crisis (see also section 7).
4.3.3 The policy statement of a locally incorporated conventional bank licensee must cover both
its local and overseas operations as well as all related entities that may have a significant impact
on its
liquidity. If the conventional bank licensee manages liquidity on a group basis, the policy
statement should address issues relevant to the conventional bank licensee and the group as a
whole.
4.3.4 Regardless of whether liquidity management is centralised at the head office, Bahraini
branches of conventional bank licensees incorporated outside Bahrain must still formulate a
policy statement for their Bahrain operations. It should, in particular, include the line of
23
responsibility for monitoring the liquidity in Bahrain and the reporting arrangements to head
office. CBB will also take into account the global liquidity management policies of the head
office, especially for the monitoring of branches, and the home authority’s supervisory approach
to liquidity (including whether it monitors the liquidity of the overseas branches and subsidiaries
and is aware of their liquidity policies).
4.3.5 To facilitate the effective implementation of liquidity management policies, conventional
bank licensees must establish appropriate procedures which detail the operational steps and
processes for the execution of various risk controls. The procedures must also be reviewed at
least annually and updated to take into account new business activities and changes in risk
management processes.
4.3.6 Managing liquidity is not purely the responsibility of the treasury or risk management
function. Conventional bank licensees should communicate the liquidity management policies
and procedures to all relevant personnel throughout the organisation, including all business units
that conduct activities with an impact on liquidity. They should be fully aware of the liquidity
management strategy and their role and responsibilities in relation to approved policies,
procedures and limits.
4.4 Management information systems
4.4.1 Conventional bank licensees must have adequate management information systems
(―MIS‖) for measuring, monitoring, controlling and reporting liquidity risk under normal and
stressed
situations.
4.4.2 The MIS should encompass all significant causes of liquidity risk, including those
associated with new products and business initiatives, and be capable of evaluating the effect of
such causes on a conventional bank licensee’s cash flows and liquidity ratios. In particular, the
MIS should be capable of:
 calculating cash flows and maturity mismatch positions arising from the full range of a
conventional bank licensee’s assets, liabilities and off-balance sheet positions on a daily
basis over a series of specified time periods;
 analysing cash flows and maturity mismatch positions in all currencies in which a
conventional bank licensee operates, both individually and on an aggregate basis on a
daily basis;
 calculating and projecting various limits and ratios in relation to liquidity for both
prudential and internal risk management purposes on a daily basis;
 checking compliance with established liquidity policies and limits, and generating
exception reports on a daily basis;
 reporting risk measures and liquidity trends to management on a daily basis; and
 setting out clearly the behavioural assumptions and limitations underlying the cash-flow
management reports and stress-testing analyses (see section 5 below for more details).
24
4.4.3 The MIS should also be capable of providing on a daily basis accurate and relevant
liquidity reports to senior management / ALCO and other responsible personnel for evaluation of
the level of liquidity risk under different operating circumstances.
4.4.4 The appropriate content and format of MIS reports would depend on a conventional bank
licensee’s liquidity management practices and the nature and complexity of its business. Such
reports should enable senior management / ALCO to review and monitor the following aspects
of liquidity on a daily basis:









the maturity profiles of a conventional bank licensee’s cash flows under normal and
stress scenarios;
the stock of liquid assets available and their market values;
the concentration in sources and application of funds;
the compliance with liquidity management strategies and risk tolerance levels set by the
Board of Directors;
the ability to borrow or undertake asset sales in various markets;
potential sources of volatility in assets and liabilities (and claims and obligations arising
from off-balance sheet activities);
the analysis of intra-group cash flows and accessibility to such funding;
the capacity of providers of standby facilities to meet their obligations; and
the impact of adverse trends (e.g. decline in asset quality, market or operational
disruptions etc.) on future cash flows and market confidence.
4.5 Independent reviews and audits
4.5.1 Conventional bank licensees must conduct periodic (but at least annual) reviews of
their liquidity risk management process to ensure its integrity, accuracy and
reasonableness. The reviews must be conducted by independent parties, e.g. internal or external
auditors.
4.5.2 Such reviews must, among other things, cover the following areas:
 the adequacy of internal systems and procedures for identifying, measuring and
monitoring liquidity risk;
 the appropriateness of various risk limits for controlling liquidity risk;
 the suitability of the underlying assumptions for conducting cash-flow scenario analyses;
 the integrity and usefulness of MIS reports on liquidity risk; and
 the adherence to established liquidity policies procedures and limits.
4.5.3 Conventional bank licensees with complex liquidity risk profile and measurement systems
must have their internal models or calculations validated by an independent internal or external
reviewer.
4.5.4 Any weaknesses or problems identified in the review process must be addressed by senior
management in a timely and effective manner.
25
5. Cash-flow management and reporting
5.1 Overview
5.1.1 Conventional bank licensees are required to adopt a cash-flow approach to managing their
liquidity risk. The requirements in this section complement the prudential framework for
liquidity ratios by mandating conventional bank licensees to measure, monitor and control their
cash-flow and maturity mismatch positions under different operating conditions. Conventional
bank licensees must adopt the systems and controls requirements in this section in their liquidity
management policy, their internal procedures and processes and their management and
monitoring systems. There are certain disclosure and testing requirements outlined in sub-section
5.5.
5.1.2 Under the cash-flow approach, conventional bank licensees must have in place appropriate
systems and procedures for:
 monitoring on a daily basis net funding requirements under normal business conditions;
 conducting regular cash-flow analyses based on stress scenarios; and
 developing reasonable assumptions for making the above cash-flow projections.
5.1.3 Conventional bank licensees are expected to take a conservative approach in assessing
future cash flows, as the underlying assumptions may involve considerable judgement and
discretion and could vary considerably depending on their business profile. They should be in a
position to provide analysis and evidence to justify the assumptions.
5.1.4 Conventional bank licensees must be able to generate cash-flow positions by individual
currencies and in aggregate. For those conventional bank licensees that have significant business
in currencies other than their base currency, there should be separate analysis of cash-flow
positions for individual foreign currencies in which they are active.
5.1.5 Key elements of the cash-flow management framework are set out in the subsections that
follow. Subsections 5.2 and 5.3 provide guidance on the systems and controls expected of
conventional bank licensees in respect of cash-flow management under normal and stressed
conditions, including the stress-testing procedures that should be undertaken. Subsection 5.4
further describes the approach for managing foreign currency liquidity risk. Subsection 5.5
summarises CBB’s supervisory monitoring and reporting requirements, while some hypothetical
examples are set out in Annex B to illustrate how cashflow analyses may be conducted.
5.1.6 The cash-flow analyses provided in Annex B cover the following scenarios:
 normal business conditions;
 an institution-specific crisis; and
 a general market crisis.
5.1.7 In applying the requirements of this section, CBB will adopt a more flexible approach
towards conventional bank licensees that maintain small and simple operations or whose
liquidity risk management is managed, and supervised, on an integrated global basis (see also
paragraph 5.3.18, 5.3.19 and 5.4.8 below).
26
5.2 Net funding requirements
Scope of cash-flow projection
5.2.1 In order to stay in business, conventional bank licensees need to ensure that either a
positive cash-flow position is maintained in the periods up to one month from the current
business day or otherwise sufficient cash can be generated to satisfy their funding requirements
on a daily basis.
5.2.2 Conventional bank licensees must measure and monitor their net funding requirements
going forward by constructing a maturity profile that projects future cash flows arising from
assets, liabilities and off-balance sheet transactions. All cash flows must be allocated into a series
of time bands according to their expected maturity dates, and a net mismatch figure obtained by
subtracting outflows from inflows in each time band. A cumulative net mismatch figure must be
derived by accumulating the net mismatch figures in each successive time band. This profile
enables conventional bank licensees to estimate the prospective net funding requirement in each
time band.
5.2.3 The maturity profile should, in principle, cover all cash flows (including off-balance sheet
items and non-banking items such as salaries, dividends, and general business expenses). Senior
management / ALCO may however approve the exclusion from the profile of certain cash flows
that are considered to be immaterial. The rationale and materiality thresholds for such exclusions
should be properly documented in the liquidity management policies. Conventional bank
licensees should review periodically whether such exclusions remain appropriate.
5.2.4 The maturity profile must encompass adequate time bands so that conventional bank
licensees can monitor their short-term as well as medium- to longer-term liquidity needs. The
relevant time frame for active liquidity management is generally quite short. It is common best
practice for conventional bank licensees to have daily time bands in the very short term (say for a
period of five to seven days), followed by wider and less granular time bands for other periods.
The time frame could also vary depending on a conventional bank licensees’ business.
5.2.5 While the primary focus of the maturity profile is on short-term cash flows, conventional
bank licensees should also review the mismatch positions for the medium- to longer-term time
bands to identify any early sign of potential liquidity problems.
5.2.6 Conventional bank licensees are generally expected to perform cash-flow analysis for all
currencies in aggregate as well as those denominated in Bahraini Dinars. If a conventional bank
licensee has significant business denominated in foreign currencies, separate analysis of the
maturity mismatch positions of individual foreign currencies in which it is active should also be
performed.
27
Maturity mismatch limits
5.2.7 Conventional bank licensees must set internal limits to control the size of their cumulative
net mismatch positions (i.e. where cumulative cash inflows are exceeded by cumulative cash
outflows) for the short-term time bands up to one month (i.e. ―next day‖, ―7 days‖ and ―1
month‖). Such limits should be conservative, realistic and commensurate with their normal
capacity to fund in the interbank market. Maturity mismatch limits should also be imposed for
individual foreign currencies in which they have significant business.
5.2.8 The maturity mismatch limits must be properly documented in the liquidity management
policy statement. Conventional bank licensees must keep their negative cumulative net
mismatches within the established limits, and if any exceptions take place, these must be
approved by senior management / ALCO and fully justified. The conventional bank licensees’
compliance with such limits should also be regularly reviewed by an independent unit from the
concerned business areas.
Assumptions and techniques
5.2.9 In order to provide prudent projections of expected cash flows, conventional bank licensees
should, as far as possible, incorporate in the maturity profile realistic assumptions underlying the
behaviour of their assets, liabilities and off-balance sheet activities rather than relying simply on
contractual maturities. These assumptions may include:
 the proportion of maturing assets and liabilities that conventional bank licensees expect to
roll over or renew;
 the proportion of marketable securities which are planned for sale before maturity;
 the behaviour of assets and liabilities with no clearly specified maturity dates, such as
repayment of overdrafts and retail call/current accounts;
 potential cash flows arising from off-balance sheet activities, e.g. drawdown under loan
commitments and contingent liabilities6;
 convertibility of foreign currencies; and
 access to wholesale markets, standby facilities and intra-group funding.
5.2.10 In making cash-flow assumptions and projections, conventional bank licensees may use a
number of techniques ranging from historical experience and static simulations based on current
holdings to sophisticated modelling (for more complex conventional bank licensees). The
techniques employed by conventional bank licensees should be commensurate with the nature
and complexity of their business activities.
5.2.11 One way of projecting cash flows is to analyse historical observations to determine cashflow patterns and derive behavioural assumptions applicable to the cash flows. There is no
standard methodology for making the assumptions. What is important is the use of consistent and
reasonable assumptions that are supported by sufficient historical evidence. The minimum
criteria that conventional bank licensees are required to meet if they intend to use behavioural
assumptions for the cash-flow analyses are set out in Annex C.
28
5.2.12 As an illustration, in projecting the cash flows of retail deposits, a conventional bank
licensee may track the minimum outstanding balance of such deposits in the past 12 months and
regard this as a ―core deposit‖ balance to be slotted into the ―over 1 year‖ time band of the
maturity profile. Any remaining balance may then be evenly distributed over different time
bands within one year.
6 All potential drawdowns from legally binding and non-binding commitments should be included.
29
5.2.13 Under a ―business as usual‖ situation, marketable debt securities, in particular those that
are held by conventional bank licensees for long term investment7, should normally be allocated
to the time bands according to their remaining contractual maturity. Listed debt securities that
are held for trading purposes or available for sale8 may be allocated to the short-term time bands
if they represent surplus liquidity that can be turned into cash quickly to meet funding needs if
required (i.e. cash can be received on a same day or spot basis). Any cash inflows arising from
their expected liquidation should however incorporate the lead time required before the cash can
be made available, taking into account the settlement time and the impact of time differences if
the clearing or custodian agents are located outside Bahrain.
5.2.14 Conventional bank licensees may, as a general rule, treat normal intra-group transactions
(i.e. intra-group placements and borrowings transacted at arm’s length) in the same way as other
third party transactions for the purpose of incorporating the relevant cash flows in the maturity
profile, provided that there is no doubt about the financial position of the banking group as a
whole. However, conventional bank licensees are not expected to include claims on their head
office / parent bank under back-to-back transactions as cash inflows because such claims would
normally be rolled forward continuously.
5.2.15 In projecting the cash flows, conventional bank licensees should also consider general
economic and market trends as well as other relevant information that could affect their ability to
access
funds readily and at reasonable terms (e.g. a credit rating downgrade).
5.2.16 Conventional bank licensees should document in their liquidity management policy
statement the underlying assumptions used for estimating the cash-flow projections in the
maturity profile and the rationale behind them. The assumptions and their justifications should be
approved by senior management / ALCO and subject to regular review to take account of
available statistical evidence and changing business environment.
5.3 Stress-testing and scenario analysis
5.3.1 CBB considers that whether a conventional bank licensee can be regarded as having
sufficient liquidity depends to a great extent on its ability to meet obligations under a funding
crisis. Therefore, in addition to monitoring net funding requirements under normal business
conditions, conventional bank licensees should conduct regular stress tests by applying various
―what if‖ scenarios on their liquidity positions for all currencies in aggregate to ensure that they
have adequate liquidity to withstand stressed conditions. These stress tests should also be
separately conducted for positions in Bahraini Dinars and individual foreign currencies in which
they have significant positions.
7 These
8 These
refer to securities classified as ―held-to-maturity debt securities‖ under IAS 39.
descriptions ―held for trading‖ and ―available for sale‖ are defined in IAS 39
30
5.3.2 It is important for conventional bank licensees to construct plausible adverse scenarios and
examine the resultant cash-flow needs. While conventional bank licensees are encouraged to
cover stress events of different types and levels of adversity, they must, at a minimum, include
the following scenarios in their stress-testing exercise:
 an institution-specific crisis scenario; and
 a general market crisis scenario (based on assumptions prescribed by CBB from time to
time).
Institution-specific crisis scenario
5.3.3 An institution-specific crisis scenario should cover situations that could arise from the
conventional bank licensee experiencing both real or perceived problems (e.g. asset quality
problems, solvency concerns, rumours on a conventional bank licensee’s credibility or
management fraud, etc.). It should represent the conventional bank licensee’s extreme view of
the behaviour of its cash flows in a crisis (i.e. a ―worst case‖ scenario for the conventional bank
licensee). A key assumption is that many of the conventional bank licensees’ liabilities cannot be
rolled over or replaced, resulting in the need to secure emergency liquidity.
5.3.4 This ―worst case‖ scenario should include a deposit run for retail conventional bank
licensees. Such a scenario would typically include the following characteristics:
 significant daily run-off rates for deposits, with increasing requests from customers to
redeem their time deposits before maturity;
 interbank deposits repaid at maturity;
 no new unsecured funding obtainable from the market; and
 forced sale of marketable securities at discounted prices.
5.3.5 Foreign banks (i.e. branches and subsidiaries of foreign banking groups) should consider
two types of institution-specific crisis scenario, namely a crisis that is restricted to their Bahrain
operations and a crisis that affects the global operations of the banking group (e.g. with problems
originating from the head office or parent bank). In the latter case, no intra-group or head office
funding support should be assumed to be available. This is because such support, which would
be of particular value in a crisis affecting the Bahrain operations only, could prove to be
ineffective if the crisis impinged on the group as a whole.
5.3.6 There are other institution-specific scenarios that are less severe in the short term but may
subject a conventional bank licensee to longer term liquidity pressures. These scenarios may be
triggered by possible changes in the market and public perceptions of a conventional bank
licensee (e.g. as a result of a credit rating downgrade) that affect its access to funds or cause a
gradual drain on its liquidity. As mentioned earlier, conventional bank licensees are encouraged
to take account of different scenarios applicable to their own circumstances as part of the
ongoing liquidity risk management process.
31
General market crisis scenario
5.3.7 A general market crisis scenario is one where liquidity at a large number of financial
institutions in one or more markets is affected. Characteristics of this scenario may include a
general liquidity squeeze, counterparty defaults, substantial discounts needed to sell assets and
wide differences in funding access among conventional bank licensees due to the occurrence of a
severe tiering of their perceived credit quality (i.e. flight to quality).
5.3.8 Conventional bank licensees should be aware that the cash-flow patterns of certain assets
and liabilities may behave quite differently in the case of a general market crisis scenario. For
example, compared with the institution-specific crisis scenario, a conventional bank licensee
may have less control over the level and timing of future cash flows from the sale of marketable
debt securities. This could be due to the fact that only very few market participants are willing or
have sufficient liquidity to purchase securities. Hence, conventional bank licensees should assign
appropriate discount factors to such assets to reflect the price risk associated with different stress
scenarios. Moreover, the impact of a general market crisis on individual conventional bank
licensees may differ. For example, a conventional bank licensee with a strong market reputation
may benefit from a flight to quality as depositors seek a safe haven for their funds.
5.3.9 The inclusion of a general market crisis scenario in conventional bank licensees’ liquidity
stress-testing is to facilitate CBB’s assessment of the vulnerabilities and soundness of the
Bahrain banking sector in response to events causing general market disruptions. Where
appropriate, CBB will make use of the data and results generated from conventional bank
licensees’ scenario analysis in its own stress-testing exercise.
Requirements
5.3.10 Conventional bank licensees must perform stress-testing and scenario analysis on a
quarterly basis. Senior management / ALCO must examine the stress-testing results and
formulate appropriate strategies to address the cash-flow needs reflected from the scenario
analysis. For example, there may be a need to reduce liquidity risk by obtaining more long-term
funding or restructuring the composition of assets.
5.3.11 While a severe liquidity crisis at an individual conventional bank licensee may stem from
other problems not related to its liquidity, the conventional bank licensee’s ability to honour its
immediate commitments under such conditions could provide vital time for it to arrange funding
support from other sources9 and take actions to address the underlying problems. This will
increase its chance of surviving the crisis.
Such support may include capital injection from major shareholders, intra-group or head office support if the group is not the
source of crisis, and support from relevant central banks or monetary authorities.
9
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5.3.12 As such, CBB would normally expect a conventional bank licensee to have sufficient
funds to continue in business, at least under the institution-specific crisis scenario, for a
minimum number of days necessary for it to arrange emergency funding support. As the nature
and size of business may differ widely among conventional bank licensees, CBB does not intend
to prescribe a standard minimum number of days for all. Conventional bank licensees must
determine this target having regard to their specific circumstances, and be prepared to justify it
when necessary. Conventional bank licensees must also establish plans to achieve this target if
they do not already do so, as reflected from the stress-testing results.
5.3.13 In conducting the scenario analysis, conventional bank licensees may factor in the
possibility of intra-group or head office support for a crisis scenario affecting the Bahrain
operations only (i.e. not applicable to one that affects the group as a whole). However, projected
cash inflows from intra-group funding lines may only be included if the arrangement is fully
committed and irrevocable or where an acceptable level of certainty can be demonstrated (e.g.
the entity providing the support must regard such support as a deduction from its own stress
liquidity calculations). Any assumption that intra-group deposits will not be withdrawn at
maturity should also be supported by formal arrangements with the placing entity. See also
subsection 6.4 below.
5.3.14 In a crisis scenario, conventional bank licensees may generally project cash inflows from
liquidating (or pledging for funding) their holdings in marketable debt securities regardless of
whether they are held for trading or long-term investment. However, conventional bank licensees
should take account of the expected level of discount in prices and the time needed to settle the
transactions.
5.3.15 Locally incorporated retail conventional bank licensees must, as part of their contingency
planning for a liquidity crisis, consider the extent to which their assets are eligible to secure
funding under CBB’s lender of last resort (―LOLR‖) framework. However, they should not
assume that such support is automatically available to them during a crisis. Retail conventional
bank licensees’ ability to access liquidity under this framework is subject to their having
sufficient high quality collateral. They should also recognise that such support can only be
sought in exceptional circumstances and as a last resort.
5.3.16 When conventional bank licensees open any new interbank relationships, particularly in
new jurisdictions, they must perform full and comprehensive due diligence to ensure that they
understand their priority and legal rights for different types of exposures in the event of possible
default by the concerned counterparty conventional bank licensee. Conventional bank licensees
should take appropriate measures to protect their rights (e.g. through the taking of collateral) to
minimise the extent of loss and damage to cash flow in the event of default.
5.3.17 The above measures should be approved by senior management / ALCO and be subject to
regular review in the light of changes in conventional bank licensees’ operations and market
environment.
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Exemptions
5.3.18 In respect of conventional bank licensees that are part of an international banking group,
their liquidity risk may be managed on an integrated global basis, with stress tests being
conducted at a regional or group level. CBB may regard this arrangement as acceptable for the
purposes of complying with the stress-testing requirements, provided that the stress scenarios can
adequately reflect the specific risk characteristics of conventional bank licensees concerned.
Conventional bank licensees having such as arrangements should discuss this with CBB.
5.3.19 CBB may exempt certain conventional bank licensees from complying with the
requirements of this subsection if the nature and scale of their operations do not warrant the use
of such risk management techniques. Conventional bank licensees that might be exempted
include, for example, those that maintain a simple and small operation with positive funding
positions (based on cash flows which are mostly contractual and predictable).
5.4 Foreign currency liquidity management
5.4.1 In addition to managing liquidity risk in Bahrain Dinars and all currencies in aggregate,
conventional bank licensees should have adequate systems in place for measuring, monitoring
and controlling the cash-flow and mismatch positions in each major foreign currency in which
they are active.
5.4.2 Conventional bank licensees are required to formulate liquidity strategies and policies for
individual currencies which represent a material portion of their funding base 10 or are not
currencies that are freely convertible into Bahrain Dinars. The effectiveness of such strategies
and policies must be reviewed on at least an annual basis.
5.4.3 In managing individual currency funding needs, conventional bank licensees should
address issues that relate to their nature of business and funding strategies. For example, some
conventional bank licensees may rely on foreign currency liabilities to fund a portion of their
Bahrain Dinar assets while others may fund their foreign currency assets with Bahrain Dinar
funding via the foreign exchange or currency swap markets. In these cases, conventional bank
licensees will need to assess and monitor the risk of adverse exchange rate movements that could
widen existing liquidity mismatches 11 as well as the likely convertibility of foreign currencies
and access to foreign exchange markets for switching funding from one currency to another.
CBB will normally regard a currency position as material if the amount of a bank’s on-balance sheet assets or liabilities,
whichever is the larger, in that currency together with the sum of its expected cash inflows and outflows from off-balance sheet
and contingent activities in the same currency is more than 10% of its total customer deposits in all currencies.
11 If a bank runs a negative maturity mismatch in a foreign currency (i.e. with liabilities exceeding assets in that currency for a
particular time period), the mismatch position in Bahrain Dinar terms will worsen should the foreign currency appreciate
significantly against the Bahrain Dinar.
10
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5.4.4 As a general principle, conventional bank licensees should manage and control their
funding needs to avoid over-reliance on foreign exchange or currency swap markets, as there is a
risk that access to these markets may cease to be available. In this regard, conventional bank
licensees must consider setting internal limits to control the amount of foreign currency liabilities
that can be swapped through the foreign exchange market to fund local currency assets, or vice
versa.
5.4.5 Apart from assessing the aggregate foreign currency liquidity needs and the acceptable
mismatch in combination with Bahrain Dinar commitments, conventional bank licensees must
separately analyse the maturity mismatch positions of foreign currencies in which they have
significant positions under both normal and stressed conditions.
5.4.6 Conventional bank licensees must set and regularly review internal limits to control the size
of cumulative net mismatches over particular time bands (e.g. ―next day‖, ―7 days‖ and ―1
month‖) for foreign currencies in aggregate and for each significant foreign currency with
material balances in which they operate. Such limits are generally expected to be lower than
those for Bahrain Dinars or their base currency.
5.4.7 In developing liquidity management strategies for individual foreign currencies and
determining the size of maturity mismatches in those currencies, conventional bank licensees
(particularly those with active involvement in multiple currencies) should take into account, inter
alia, the following factors:
 the convertibility of individual foreign currencies, the volatility of relevant exchange
rates as well as the timing of access to funds in those currencies;
 conditions of foreign exchange markets, including the depth and liquidity of the markets
and the relative and absolute levels of interest rates;
 Conventional bank licensees’ ability to have access to interbank money markets for
foreign currency funding as well as other foreign exchange and currency swap markets;
 the impact of potential disruptions to foreign currency markets and exchange risks (i.e.
without presuming that surplus liquidity in one currency can always be used to meet the
shortfall in another currency);
 the ―stickiness‖ of deposits in foreign currencies under stressed conditions;
 the availability of foreign currency backup facilities to cater for circumstances in which
normal access to funding in individual currencies is disrupted;
 differences in the behaviour of foreign currency depositors/lenders vis-à-vis those of
local customers and counterparties; and
 the ability of borrowers to repay their foreign currency liabilities under stressed
conditions (e.g. interest rate hikes and fluctuation in exchange rates).
5.4.8 CBB may allow conventional bank licensees with international operations that can
demonstrate proficiency in foreign exchange risk management and full convertibility among the
individual foreign currencies they operate in to maintain aggregate foreign currency mismatch
limits only.
35
5.5 Supervisory and reporting arrangements
5.5.1 As part of its review of conventional bank licensees’ liquidity management policy
statement, CBB will consider the suitability and reasonableness of the following limits and
assumptions set by conventional bank licensees, having regard to the nature and complexity of
their operations:
 maturity mismatch limits and behavioural assumptions adopted for constructing the
maturity profile under normal business conditions;
 the cash-flow assumptions for conducting stress-testing under the institution-specific and
general market crisis scenarios. CBB will provide input on the scope of the general
market crisis scenario; and
 the minimum number of days of positive liquidity targeted by individual conventional
bank licensees under the institution-specific crisis scenario.
The above must also cover positions in individual currencies in which a conventional bank
licensee has material business.
5.5.2 CBB may review the techniques used by individual conventional bank licensees to estimate
future cash flows, and request them to provide historical/statistical evidence or other justification
to support the size of their internal mismatch limits and cash-flow assumptions. CBB must be
notified of any subsequent changes in these limits and assumptions.
5.5.3 Conventional bank licensees are required to submit to CBB each quarter (or more
frequently if necessary) internal liquidity management reports. These reports should cover the
following:
 the cash-flow analysis under normal business conditions;
 the stressed liquidity reports for both the institution-specific crisis scenario and general
market crisis scenario; and
 the cash-flow analysis and stressed liquidity reports for individual currencies in which a
conventional bank licensee has significant positions.
5.5.4 CBB will make use of the above information to monitor the liquidity of individual
conventional bank licensees, including:
 the net funding requirements of a conventional bank licensee as reported in the maturity
mismatch analysis with reference to its internal limits and behavioural assumptions;
 the reported stress-testing results to assess a conventional bank licensee’s ability to
withstand crisis situations and to identify any notable changes in its liquidity risk profile.
Where necessary, CBB will discuss with the conventional bank licensee’s management
about its strategies to address the results generated; and
 the trend of a conventional bank licensee’s mismatch positions in individual foreign
currencies against its internal limits. CBB will also seek to understand the underlying
liquidity strategies for such currencies.
5.5.5 CBB will identify whether there are any ―outlier‖ conventional bank licensees in terms of
the proportion of local currency assets being funded by foreign currency liabilities (or vice
versa). This is to ensure that there is no over-reliance on foreign currency funding or on swap
markets.
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5.5.6 As part of its internal stress-testing exercise, CBB will conduct liquidity-related stress tests
to assess the ability of individual conventional bank licensees to cope with a funding crisis. In
this connection, CBB will collect relevant information from locally incorporated conventional
bank licensees under the quarterly Liquidity Stress-testing Return. The Return requires reporting
conventional bank licensees to provide information on selected asset and liability items,
including a breakdown of the composition of customer deposits, debt securities held and
residential mortgage loans. CBB may request other conventional bank licensees to submit this
Return on an ad hoc or need basis.
5.5.7 CBB will review the effectiveness of conventional bank licensees’ cash-flow management
frameworks during on-site examinations.
6. Asset and liability management
6.1 Liquid asset holdings
6.1.1 The guidance in this section is for the conventional bank licensees’ internal management
purposes and does not refer to any prudential or regulatory requirements. Such prudential or
regulatory requirements are contained in section 3.
6.1.2 Conventional bank licensees must maintain an appropriate mix of high quality liquid
assets12 as a source of liquidity reserve for meeting emergency funding needs. The amount and
composition of such assets should be determined by individual conventional bank licensees with
reference to the nature of their business and liquidity risk profile.13
6.1.3 Liquid assets are usually defined as assets that can be quickly and easily converted into
cash in the market at a reasonable cost. In this respect, due consideration should be made of the
time-to-cash period (the time to necessary to convert assets into cash).
6.1.4 In order to analyse the liquidity of an asset, institutions and supervisory authorities need to
differentiate between normal and stressed times, taking into account the role of central banks’
refinancing policies, particularly in times of stress.
6.1.5 Conventional bank licensees must set out their strategy for holding liquid assets, including
the types and quality of assets to be held for liquidity purposes and the level of such holdings.
Concentration limits should also be established where appropriate to avoid excessive exposure to
market and other risks within the asset portfolios in respect of asset type, counterparty,
geographic location and economic sector.
12Generally,
liquid assets include cash, bank placements under one month maturity and debt securities listed or traded on major
exchanges, financial instruments issued or guaranteed by governments and banks and other paper with credit ratings of at least
AA- or equivalent.
13A bank’s liquid asset holdings should also be sufficient to meet the prudential requirements under the applicable minimum
liquidity ratios.
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6.1.6 Marketable debt securities are commonly held by conventional bank licensees as a form of
liquid assets. While they represent a readily available source of liquidity in the case of need, the
value of such securities is often influenced by market and interest rate risks. There may thus be
questions as to whether the securities could be liquidated within a short period of time and at a
reasonable price if general market conditions are unfavourable. In determining the types and
amount of marketable debt securities to be held as liquid assets, it is important that conventional
bank licensees have particular regard to the following aspects:
 the depth and liquidity of the market; i.e. how fast an asset could be sold and how much it
could realise;
 the percentage of an issue held by a conventional bank licensee;
 the credit rating of securities held;
 the currency of denomination of securities held;
 the expected maturity date, taking into account the possibility of early redemption or
disposal; and
the probability of using the securities as collateral for borrowing funds either in the open market
or from CBB or other central bank / monetary authority.
6.1.7 Conventional bank licensees should seek to maintain a well-balanced portfolio of high
quality liquid debt securities with limits by type, tenor and currency, and monitor the proportion
of such
securities within the balance sheet to avoid undue reliance on such assets.
6.1.8 CBB Treasury Bills and Sukuks are particularly useful to conventional bank licensees in
liquidity risk management. In the event of a funding crisis, they can be sold or pledged almost
immediately. Conventional bank licensees are therefore recommended to hold an appropriate
amount of CBB Treasury Bills and Sukuks for liquidity purposes.
6.1.9 Conventional bank licensees are also expected to maintain a proportion of their liquid
assets in Bahrain as it is generally easier and quicker to sell or pledge assets that are physically
located in Bahrain in crisis situations.
6.1.10 For the purpose of managing intraday liquidity (see also subsection 6.5 below),
conventional bank licensees participating directly in clearing and settlement systems should hold
within their stock of high quality liquid assets an appropriate amount of securities that are
eligible for intraday repurchase transactions with CBB. In determining the size of such holdings,
conventional bank licensees should take into account the volume and volatility of transactions
that they may be required to process.
6.2 Diversification and stability of liabilities
6.2.1 Conventional bank licensees must seek to maintain diversified and stable funding sources
by determining the appropriate mix of liabilities and building strong and lasting relationships
with key fund providers.
6.2.2 Conventional bank licensees should avoid any potential concentration in their funding
sources 14 . Concentration limits must be established, together with systems for monitoring
38
compliance with these limits, so that any undue reliance on a single counterparty (or group of
related counterparties), product or market may be prevented.
6.2.3 What would constitute a funding concentration cannot be expressed in definite sizes or
amounts, as this depends on the nature and complexity of a conventional bank licensee’s
business activities. Conventional bank licensees should take into account the following aspects in
assessing the degree of liability concentration:
 the maturity profile and credit-sensitivity of the liabilities;
 the mix of secured and unsecured funding;
 the extent of reliance on –
- a single liability provider or a related group of liability providers;
- particular instruments or products (e.g. interbank borrowing, retail versus
wholesale deposits, and repurchase agreements and swaps); and
- intra-group funding (see also subsection 6.4 below); and
 geographic location, industry or economic sector of liability providers.
6.2.4 Conventional bank licensees must undertake appropriate analysis of the characteristics of
their liabilities and the potential impact these may have on their liquidity position. For example,
conventional bank licensees should be aware that, in times of market turbulence, a proportion of
their credit-sensitive liabilities (such as wholesale funding or large corporate deposits) may be
withdrawn, particularly if the funding is unsecured. Secured funding may also be affected, with
counterparties seeking better quality collateral or larger haircuts on collateral.
6.2.5 Conventional bank licensees must identify which funding sources are likely to stay with
them under most circumstances, which are likely to run-off gradually if problems arise and
which to run-off immediately at the first sign of problems. The objective is to identify and build
up an appropriate level of ―core‖ funding and to minimise reliance on liabilities that are volatile.
In particular, conventional bank licensees with a large deposit base should have a system to carry
out statistical and behavioural analysis to detect any signs that the average life of retail deposits
is shortening or that the deposit base is becoming more volatile. Conventional bank licensees
must also be cautious about attracting deposits mainly by way of offering above market rates of
interest or promotional gift items. Such deposits will tend to be highly volatile. Do the facts
back this statement up?
14 A funding concentration exists when a single decision or factor has the potential of causing a significant or sudden withdrawal
of funds.
39
6.2.6 It is important for conventional bank licensees to assess their exposure to large fund
providers (or depositors) on an ongoing basis. At a minimum, conventional bank licensees
should review regularly reports on large fund providers (at a minimum, the largest ten) which
consolidate all funding that a conventional bank licensee obtains from each provider or related
group of providers. The historical performance of these fund providers, e.g. in terms of the
maximum, minimum and average balances over the previous 12 months, should also be
monitored. Trigger ratios must be established to identify any funding concentration for
management review. In the case of a retail conventional bank licensee, a funding concentration
may exist if a material amount of its total deposit base is from the top ten depositors or a single
depositor (or group of related depositors). Conventional bank licensees should consider whether
action needs to be taken to address the issue (e.g. diversify the deposit base).
6.2.7 Conventional bank licensees should aim to foster relationships with depositors and other
liability holders (e.g. trading counterparties, correspondent conventional bank licensees and
corporate customers) through such means as quality of service and, in case of large depositors,
personal contact. The frequency of contact and the frequency of use of a funding source are two
possible indicators of the strength of a funding relationship.
6.2.8 While connected deposits are, generally speaking, a more stable funding source than
deposits from unconnected parties, CBB would wish conventional bank licensees to broaden, as
far as possible, their deposit base rather than relying too heavily on connected deposits.
6.3 Access to interbank and other wholesale markets
6.3.1 The ability to obtain funds in the interbank market is an important source of liquidity for
conventional bank licensees. Conventional bank licensees must be in a position to estimate their
―normal‖ borrowing capacity based on past experience and aim to limit their wholesale funding
needs for both local and foreign currencies on, say, a daily and weekly basis to an amount which
is comfortably within that capacity. It may also be sensible to test their name in the market on a
regular basis even if there is no immediate need for funds.
6.3.2 Conventional bank licensees’ capacity to borrow from the interbank market depends on a
number of factors, including the size and turnover of the local market, their share of that market
as well as the credit limits imposed by counterparties. Given these factors, it may not be feasible
for a conventional bank licensee to be absolutely certain about its borrowing capacity in the
interbank market. Therefore, in setting internal targets for interbank borrowing, conventional
bank licensees should ensure that such targets have actually been attained and exceeded on a
reasonable number of occasions. This will help give some assurance that the targets could be
achieved without causing any adverse market reaction.
6.3.3 Conventional bank licensees should also recognise that their ability to obtain interbank
borrowing may be radically reduced in crisis conditions. To address this risk, conventional bank
licensees should build up and monitor their relationships with their main providers of funds.
They may try to arrange standby credit lines with other conventional bank licensees or
counterparties. However, conventional bank licensees should recognise that their right to draw
on these facilities may be denied in a crisis – the fund providers may simply not honour their
40
contractual obligations by refusing to advance any funds to the conventional bank licensees.
There might also be calls for early repayment of drawings under these facilities triggered by
defaults or breaches of material adverse change clauses. Conventional bank licensees should
therefore avoid any excessive reliance on standby facilities. Where a conventional bank
licensee’s standby facilities constitute a major source of liquidity in an emergency situation,
CBB will seek to be satisfied as to the certainty of these arrangements. Conventional bank
licensees should seek the repayment of money market placements on maturity on a regular basis,
rather than rolling over the placements, to ensure that the counterparty is able to repay its
borrowing on maturity.
6.3.4 Developing the ability to sell assets (e.g. through inclusion of sale clauses in loan
documentation or use of securitisation structures) or exploring arrangements under which a
conventional bank licensee can borrow against its assets (e.g. through repurchase agreements)
may provide additional liquidity support under adverse circumstances. Prearrangements to
generate funding from less liquid assets when required could also be an important element of
managing liquidity risk.
6.3.5 Asset securitisation may also provide a means of improving the liquidity of the balance
sheet. In generating liquidity through asset securitisation, however, conventional bank licensees
should be aware that peculiarities related to certain asset securitisation transactions, such as early
amortisation15, and excessive reliance on a single funding vehicle may increase liquidity risk.
They should also be aware that their ability to securitise assets may diminish in stressed market
conditions. In addition, the time taken to organize a securitisation transaction may imply that it
cannot be relied upon to provide liquidity at short notice.
6.4 Intra-group liquidity
6.4.1 Intra-group fund transfers could affect a conventional bank licensee’s liquidity in various
ways. For example, a conventional bank licensee may be required to extend support to group
companies experiencing liquidity problems, while funding provided by other related entities to
the conventional bank licensee may be withdrawn in an emergency.
6.4.2 Conventional bank licensees should therefore have adequate policies and systems to
manage their intra-group liquidity arrangements. In particular, conventional bank licensees
should specify in their liquidity management strategy the treatment of intra-group liquidity and
assumptions on intra-group dependencies.
They should also be able to monitor and analyse how the funding positions of other group
companies might affect their own liquidity, and to address any regulatory or legal impediments
to accessing liquidity on a group basis.
6.4.3 Where conventional bank licensees provide significant funding or liquidity support to other
group or related entities (e.g. in the form of explicit guarantees or funding lines to be drawn at
times of need), they should ensure that such support is appropriately accounted for in the
measurement of their own liquidity positions.
15 Early amortisation
provisions allow investors to be paid out prior to the original stated maturity of the securities issued once the
provisions are triggered.
41
6.4.4 A locally incorporated conventional bank licensee that decentralises or partially delegates
liquidity management among operating units in or outside Bahrain should clearly document its
policies and limits established for those units as well as any internal liquidity support
arrangements provided to the units. The policies should also address how liquidity of the units is
monitored and controlled by head office management in Bahrain.
6.4.5 A local branch or authorized subsidiary of a foreign bank should generally be able to rely
on the support of its head office or parent bank in a crisis affecting only the Bahrain operations.
Such support could however be called into question if the crisis affected the conventional bank
licensee or group as a whole.
6.4.6 Back-to-back transactions between the Bahrain operation and the head office / parent bank
of foreign banks should generally be excluded from their cash-flow and liquidity projections.
However, those transactions that were previously approved by CBB may continue to be included
in the calculation of the liquidity ratio provided that the conditions set out in para. 3.3.2 above
are met on an ongoing basis.
6.4.7 CBB will monitor the level and trend of intra-group transactions reported by conventional
bank licensees in the monthly Liquidity Return. It may consider restricting intra-group
transactions by setting limits to ―ring-fence‖ the Bahrain operation of a banking group if the
financial or liquidity position of the rest of the group is in doubt.
6.4.8 In the case where a locally incorporated conventional bank licensee deploys a significant
proportion of its liquidity through a deposit-taking subsidiary or an overseas branch, CBB may
require the conventional bank licensee to observe the prudential liquidity ratio and its internal
maturity mismatch limits on a consolidated basis by including the position of the subsidiary or
branch in the calculation.
6.5 Intraday liquidity
6.5.1 Structural and operational changes in payment systems have increased the importance of
managing intraday liquidity. Conventional bank licensees that participate directly in clearing and
settlement systems must take appropriate steps to ensure that they have sufficient collateral to
cover cash positions and systems capable of monitoring intraday liquidity positions and cash
needs.
6.5.2 Conventional bank licensees should also be aware that in stressed conditions they are likely
to require more intraday liquidity than in normal market conditions for a variety of reasons,
including payments due to conventional bank licensees being delayed and wholesale depositors
withdrawing from the market. Conventional bank licensees should take account of this in their
stress-testing and scenario analysis.
6.5.3 Conventional bank licensees that provide clearing services to correspondent conventional
bank licensees should be able to measure the value of payments traffic and have systems to keep
42
track of the balances in memo accounts. They should also be able to estimate the likely cash
flows arising from future payments traffic.
6.6 Liquidity ratios and limits
6.6.1 Conventional bank licensees must establish liquidity ratios and limits to control the nature
and level of liquidity risk that they are willing to assume. In setting these ratios and limits,
consideration must be given to a conventional bank licensee’s business strategies and activities,
its past performance, the level of its earnings and capital available to absorb potential losses, as
well as its tolerance for risk. The ratios and limits must be properly documented in the liquidity
management policy statement and subject to at least annual review. They should be revised when
conditions or risk tolerances of a conventional bank licensee change.
6.6.2 Set out below are some typical examples of ratios and limits used by conventional bank
licensees for liquidity risk management:
 target stock liquidity ratio (see subsection 3.4 above for more details);
 maturity mismatch limits for local and major foreign currencies (see subsections 5.2 and
5.4 above for more details);
 concentration limits in respect of the mix of assets and liabilities (see subsections 6.1 and
6.2 above for more details); and
 Net loans to total deposits ratio or other ratios appropriate to a conventional bank
licensee’s business activities (see sub section 3.6 and Annex D for more details).
6.6.3 Senior management / ALCO should ensure compliance with the established ratios and
limits. The responsibility for monitoring such ratios and limits should be assigned to a function
independent of the funding areas. There should also be a defined procedure for reporting
exceptions or breaches to senior management / ALCO, which can be early indicators of excess
risk or inadequate liquidity risk management.
6.6.4 Liquidity ratios and limits should always be used in conjunction with more qualitative
information such as a conventional bank licensee’s funding capacity (e.g. in terms of a reduction
in credit lines or increasing requests for early withdrawals of deposits) to reveal material
liquidity trends.
6.6.5 CBB will review the liquidity ratios and limits set by a conventional bank licensee having
regard to its liquidity risk profile and the actual ratios/positions run by it in relation to those of its
peers and other indicators of the conventional bank licensee’s liquidity.
7. Contingency plan
7.1 Overview
7.1.1 Every conventional bank licensee must formulate a formal contingency plan that sets out a
strategy for dealing with a liquidity crisis and the procedures for making up cash-flow deficits in
emergency situations. It is also important that conventional bank licensees identify and
43
understand the types of events that may trigger the contingency plan. Mechanisms should be in
place to facilitate monitoring of these trigger events.
7.1.2 As part of the contingency plan, conventional bank licensees must outline how they handle
press and broadcasting media when market sensitive information about them is disseminated.
7.1.3 The contingency plan must be updated and reviewed regularly (at least annually) by senior
management / ALCO to ensure that it remains robust over time. In addition, conventional bank
licensees are required to conduct rehearsals of the contingency plan from time to time to better
prepare themselves for unfavourable situations.
7.2 Early warning indicators
7.2.1 To assess whether a potential liquidity problem may be developing, conventional bank
licensees must identify various internal and market indicators, including:
Internal indicators






deteriorating asset quality;
excessive concentrations on certain assets and funding sources;
decline in earnings and interest margins;
increase in overall funding costs;
rapid asset growth being funded by volatile wholesale liabilities; and
worsening cash-flow positions as evidenced by widening negative maturity mismatches,
especially in the short-term time bands.
Market indicators






credit rating downgrades;
persistent drop in the conventional bank licensee’s stock price;
widened spread on the conventional bank licensee’s senior and subordinated debt;
reduction in available credit lines from correspondent conventional bank licensees;
counterparties unwilling to extend unsecured or longer dated transactions to the
conventional bank licensee; and
increasing trend of deposit withdrawals.
7.2.2 Conventional bank licensees must have a system for identifying and tracking such
indicators to spot potential problems at an early stage.
7.3 Strategy and procedures
7.3.1 A contingency plan for dealing with liquidity problems or crisis situations must cover at
least the following components:

Managerial coordination – reporting procedures must be in place to ensure that all
necessary information is available for senior management / ALCO to make quick
44





decisions. A clear division of responsibility must be set out so that all personnel
understand their roles in a crisis situation. This should include designated personnel who
would be responsible for identifying crises and crisis management as well as those for
promptly notifying CBB of the problems;
Early warning signals – conventional bank licensees must specify the warning signals to
be used for identifying an approaching crisis and the mechanisms to facilitate constant
monitoring and reporting of these signals;
Backup liquidity – procedures must be set out for making up cash-flow shortfalls in crisis
situations. They must clearly spell out all key sources of funds (including unused credit
facilities), their expected reliability and under what conditions these funds should be
used. Conventional bank licensees must not excessively rely on backup lines and need to
understand the various conditions, such as notice periods, that could affect their ability to
access quickly such lines. An assessment of the cost of alternative funding strategies and
the impact on capital should also be included;
Change in asset and liability behaviours – conventional bank licensees may find that
interbank placements are no longer being repaid due to standstill agreements or to
administration or liquidation of counterparties where, for example, retail liabilities may
be being repaid by counterparties, but interbank placements are not. Conventional bank
licensees should therefore outline the courses of action for altering asset and liability
behaviours to deal with crisis situations. For example, to cater for the increased deposit
run-off during a crisis, more aggressive sale of marketable assets or plans to raise
deposits would be necessary. The likely impact of particular courses of action on market
perception should also be assessed;
Customer relationships – procedures must be provided for determining the priority of
customer relationships during a crisis, e.g. the order in which credit lines would be
withdrawn from specific customers. In deciding which assets are to be disposed of,
conventional bank licensees would typically select those which are least detrimental to
business relationships and public perception about their financial soundness.
Conventional bank licensees should also maintain strong ongoing links with trading
counterparties and liability holders in order to be better positioned to secure sources of
funds under crisis situations; and
Plans for dealing with staff and the public including customers, key market participants
and the media (see also subsection 7.4 below).
7.3.2 For retail conventional bank licensees in Bahrain, procedures for obtaining and distributing
bank notes are a vital part of contingency planning. Conventional bank licensees with distant
branches must have a plan to ensure the delivery of bank notes to these branches within a short
period of time in the case of emergency.
7.3.3 For local branches and subsidiaries of foreign banks, the contingency plan should also deal
with how the management of liquidity of the Bahrain operations is integrated into their global
liquidity management. In particular, it should describe the extent to which the liquidity of the
Bahrain operation is supported by liquid assets held elsewhere and the degree of commitment of
the head office to provide liquidity support in the event of a crisis.
45
7.4 Media relationship and public disclosure
7.4.1 Good public relations management can help a conventional bank licensee counter rumours
that can result in a significant run-off by retail depositors and institutional investors. For
example, if material adverse information about a conventional bank licensee is made public, it
should be prepared to announce corrective actions immediately. This will help reduce the
uncertainties of market participants and demonstrate that the highest levels of management are
attentive to the problems that exist.
7.4.2 Public disclosure is also an important element of liquidity management. Conventional bank
licensees must provide adequate information on an ongoing basis to the public and, in particular,
to major creditors and counterparties so that it is easier for them to manage market perceptions
during crisis situations.
Annex A : Correlation of liquidity risk with other risks
A1. Any conventional bank licensee that takes on more credit risk may be increasing its liquidity
risk. A significant rise in the level of a conventional bank licensee’s non-performing loans and
bad debt charges, in particular, will be perceived by rating agencies and fund providers as signs
of deterioration in its asset quality and potential liquidity problems. This may lead to credit rating
downgrades and the demand for a risk premium from fund providers, thereby affecting the
conventional bank licensee’s fund-raising capability. If the situation has cast doubt on the
conventional bank licensee’s financial viability, it may be denied any funding at all. Many past
conventional bank licensee failures have been the combined result of severe credit and liquidity
problems.
A2. Market risk will affect a conventional bank licensee’s ability to generate liquidity from its
trading portfolio of financial instruments. Adverse changes in the value of such portfolios may
also result in volatile profits. If a conventional bank licensee is perceived to be subject to a high
level of market risk, fund providers may require the conventional bank licensee to pay higher
interest rates for funds or may even decline to provide any funding at all.
A3. Interest rate risk may have extensive effects on liquidity. Movements in interest rates will
affect conventional bank licensees in terms of the income earned from assets, the market value of
those assets and the cost of funding those assets. Conventional bank licensees’ earnings may be
squeezed depending on the direction of change in interest rates and their funding structure. Offbalance sheet instruments that are sensitive to interest rates (e.g. interest rate swaps) may also
result in unexpected cash outflows or additional funding requirements when interest rates are
volatile.
A4. Operational risk is also related to liquidity risk. Significant problems can develop quickly if
operational systems fail to process, or cause delay in the execution of, transactions. In particular,
the breakdown of fund transfer and securities clearing systems will directly affect the cash flows
of conventional bank licensees. Problems in other operational systems such as electronic or
credit card banking services may result in customer dissatisfaction and closure of accounts.
46
A5. A conventional bank licensee’s reputation is essential for attracting funds at a reasonable
cost and retaining funds during troubled times. Any negative publicity (e.g. staff fraud or
scandal), whether true or not, may undermine public confidence in a conventional bank licensee
directly or through contagion if the problems originate from its group companies. A conventional
bank licensee’s failure to honour any of its funding obligations and commitments could also be a
source of negative publicity. Even if the commitment concerned is not legally binding, it may
arouse suspicion and rumours about its financial strength. Negative publicity may prompt
depositors and other fund providers to seek greater compensation (e.g. higher interest rates) for
keeping their funds with the conventional bank licensee or to withdraw their funds. If this is not
properly dealt with, negative publicity may, in extreme situations, trigger conventional bank
licensee runs and result in serious problems for the conventional bank licensee or even the
banking industry as a whole. To minimise the potential impact of reputation risk on liquidity,
conventional bank licensees should take into account the estimated level of drawings of
commitments, legally binding or not, in its day-today cash-flow management, seek to diversify
the sources and maturity of market funding, and increase asset liquidity, as appropriate.
A6. Strategic risk may also have an impact on conventional bank licensees’ liquidity. Before
implementing any new strategy or business activity, a conventional bank licensee should assess
the liquidity implications and ascertain whether the funding planned to support the new activity
can be raised at a reasonable cost. If the liquidity impact is misjudged, strategic risk will
increase. The ability to attract and maintain sufficient liquidity is particularly important for
conventional bank licensees that are experiencing rapid asset growth.
Annex B : Examples of scenario analysis
B1. Introduction
B1.1 This Annex provides conventional bank licensees with the following examples of how
maturity mismatch / cash-flow analyses can be conducted based on normal and stress scenarios:
 Example 1: Cash-flow analysis under normal business conditions;
 Example 2: Cash-flow analysis under an institution-specific crisis scenario; and
 Example 3: Cash-flow analysis under a general market crisis scenario.
B1.2 CBB has constructed an illustrative, hypothetical portfolio for a locally incorporated retail
conventional bank licensee (hereinafter referred to as Bank X) to illustrate the changes in cashflow positions under the different scenarios.
B1.3 The explanatory notes for assumptions made under each scenario, and the relevant sample
worksheets, are set out in sections B2 to B5 below. It should however be noted that the figures
and assumptions used in the worksheets are solely for illustrative purposes. Conventional
bank licensees should develop their own methodology and assumptions based on their specific
circumstances.
47
B1.4 As in the illustrations, conventional bank licensees are expected to carry out similar
analyses to better understand their ability to maintain adequate liquidity under both normal and
crisis situations. Although only the key liquid assets and liabilities are included in the
illustrations for crisis scenarios, conventional bank licensees should cover any other items (e.g.
off-balance sheet activities) that are significant to them.
B1.5 There is no prescribed format for conventional bank licensees to conduct the analyses.
Conventional bank licensees should adopt whatever format that is most appropriate for their
operations. They may however use the sample worksheets as a reference.
B2. Explanatory notes
Example 1: Cash-flow analysis under normal business conditions
B2.1 This example illustrates how conventional bank licensees can estimate their net funding
requirements on a daily basis under normal operating conditions. For ease of reference, the
sample worksheet (see section B3 below) largely follows the format of previous simple
―Maturity Profile Return
B2.2 In this example, Bank X uses behavioural assumptions for a number of asset and liability
items to better reflect their expected cash flows. These include customer deposits, undrawn
overdraft and other commitments, and overdraft outstanding and loans payable on demand. In
determining the behavioural maturity, Bank X analyses the historical trend of specific items or
uses other methods such as simulation. Other items are mainly based on contractual maturity.
B2.3 In the case of customer deposits, Bank X takes the minimum outstanding balance of such
deposits in the past 12 months as a ―core deposit‖ balance and slots it under the ―over 1 year‖
time band in the maturity profile. The remaining balance is then evenly spread over different
time bands within one year. Conventional bank licensees may further segregate their deposits
into retail and wholesale (e.g. those placed by large corporates and private banking clients),
assuming that the former will be based on historical experiences on core balances while the latter
will be repaid according to contractual maturity.
B2.4 Bank X has maintained placements and borrowings with some related conventional bank
licensees. These intra-group transactions, which are made at arm’s length, are treated in the same
way as other interbank transactions (i.e. assuming that the funds will be repaid on maturity).
B2.5 Marketable debt securities held by Bank X, including those held for long-term investment,
are allocated to the time bands in the maturity profile according to their remaining contractual
maturity. Securities in the trading portfolio that are not relied upon to meet the prudential
liquidity ratios (i.e. representing surplus liquidity) are projected for sale with cash inflows
estimated according to the planned selling dates and expected selling prices.
B2.6 This example assumes no balance sheet growth. Conventional bank licensees may however
factor in the expected (or planned) balance sheet growth that needs funding as appropriate.
48
B2.7 Bank X has established limits to control its cumulative net mismatch position for the shortterm time bands (i.e. ―next day‖, ―7 days‖ and ―1 month‖). These limits are set within its normal
borrowing capacity. As an example, conventional bank licensees may determine such limits with
reference to the maximum level of funds they could secure from the interbank market in the past
12 months, discounted by a percentage (say, 10%).
Example 2 : Cash-flow analysis under an institution-specific crisis scenario
B2.8 Under the institution-specific crisis scenario, it is assumed that an isolated event affecting
only Bank X occurs. The event is caused by rumours about the conventional bank licensee
sustaining large credit losses that may threaten its solvency. Major cash-flow assumptions are set
out below.
B2.9 It is assumed that customer deposits will run off at a daily rate of 10% during the crisis.
However no withdrawal is assumed for pledged and connected deposits. The latter refers to
deposits placed by major shareholders or other related entities. These deposits are expected to
stay with Bank X even under crisis situations. (N.B. this assumption may not be appropriate in
the case of all conventional bank licensees.)
B2.10 The 10% deposit run-off rate is mainly for illustrative purposes. This assumption may
differ among retail conventional bank licensees and could be affected by a number of factors,
including the conventional bank licensee’s deposit size and customer profile (e.g. the proportion
of core deposit relationships). Conventional bank licensees should be able to justify their own
assumptions based on analysis of the characteristics of their deposit portfolio.
B2.11 It is also assumed that all money will be withdrawn once bank placements and borrowings
of Bank X mature. The same principle applies to negotiable debt instruments issued. However,
no cash inflow is projected from placements with connected banks upon maturity as they too will
be affected by the crisis. Due to the special nature of conventional bank licensee vostro and
Nostro balances, the whole amounts will be withdrawn on the first day of the crisis.
B2.12 As Bank X will not be able to obtain new funding from the market during the crisis, it has
to liquidate or pledge for funding its holdings in marketable debt securities at a discount.
Allowance is made for the time needed to settle the transactions (e.g. T+1 for US Treasuries).
B2.13 The results of the cash-flow analysis (see the sample worksheet under section B4 below)
indicate that Bank X’s own liquidity will only be sufficient to withstand the crisis for the first
two days. It will need to secure emergency funding support from other sources in order to stay in
business. For example, it may seek a capital injection from major shareholders and/or temporary
funding support from CBB under the LOLR framework assuming that the prescribed criteria for
such support can be met. It will also have to come up with measures to boost public confidence
in the conventional bank licensee if its problems are known.
B2.14 Based on the above results, Bank X will need to consider whether it can secure in time
other sources of funding support within the two-day period. If not, it should develop plans to
strengthen liquidity so as to lengthen the breathing space under a crisis.
49
Example 3 : Cash-flow analysis under a general market crisis scenario
B2.15 A general market crisis differs from an institution-specific crisis in that the latter involves
liquidity problems specific to a conventional bank licensee only while the former may affect the
banking sector as a whole.
B2.16 In this example, it is assumed that massive capital outflows from Bahrain have led to an
abrupt tightening of liquidity within the banking sector. The impact is felt across the board, but
the extent varies among conventional bank licensees due to different perceptions of their
financial strength and credit quality. In the case of Bank X, the impact is reduced by the fact that
it is perceived to be a conventional bank licensee with strong financials and good management
systems.
B2.17 It is assumed that customer deposits (excluding connected and pledged deposits) of Bank
X will run off at a daily rate of 5% during the crisis largely due to the migration of funds outside
Bahrain. The run-off rate is lower than that for the institution-specific crisis scenario as there is
no loss of confidence in the conventional bank licensee. Moreover, the impact is shared among
different conventional bank licensees within the banking sector.
B2.18 To meet the increased funding needs, Bank X will liquidate or pledge for funding its
portfolio of marketable debt securities. However, as there is a lack of market liquidity, some of
the securities can only be sold at deep discounts if they are to be realised quickly. This is
characteristic of a liquidity squeeze which makes it more difficult for conventional bank
licensees to dispose of their securities holdings. More time will also be needed for selling the
assets.
B2.19 It is further assumed that a portion of the interbank placements will not be repaid upon
maturity as a few counterparties do not have sufficient liquidity to honour their obligations.
Nevertheless, placements with connected conventional bank licensees will continue to be repaid
upon maturity.
B2.20 The results of the cash-flow analysis (see the sample worksheet under section B5 below)
show that Bank X has sufficient liquidity to weather the crisis for up to five days.
B3. Cash-flow analysis of Bank X under normal business conditions (Example 1)
B4. Cash-flow analysis of Bank X under an institution-specific crisis scenario (Example 2)
B5. Cash-flow analysis of Bank X under a general market crisis scenario (Example 3)
50
Annex C: Behavioural assumptions for cash-flow management
This Annex sets out the minimum criteria that conventional bank licensees are required to meet
if they intend to use behavioural assumptions to project the expected cash flows of their assets,
liabilities and off-balance sheet activities. Where necessary, CBB may review the techniques
used by individual conventional bank licensees and request them to provide evidence or
justification to support the assumptions. The minimum criteria for using behavioural assumptions
are as follows:
C1. The assumptions have to be consistent and reasonable for each scenario. For example, the
proportion of marketable debt securities which could be turned into cash before maturity and the
applicable hair-cut should vary under different scenarios to properly reflect the management’s
intention / ability to turn the securities into cash under
each scenario.
C2. The assumptions should be verified and supported by sufficient evidence, experience and
performance rather than arbitrarily selected. Typical information sources that could be used to
help formulate the assumptions include:
 historical observations or statistical analysis of cash-flow patterns / behavioural maturity
under different scenarios. For instance, the past behaviour of customer deposits with no
specified maturity dates may be a good indicator for estimating the amount of deposits
that will be withdrawn;
 models developed by conventional bank licensees or vendors for calculating cash-flow
analysis;
 managerial and business unit input about business and pricing strategies, since planned
changes to business or repricing strategies could affect the behaviour of future cash flows
of positions with uncertain maturities; and
 general economic and market trends as well as other relevant information that could
affect conventional bank licensees’ ability to access funds readily and at reasonable
terms.
C3. The length of the underlying historical observation period used for the analyses and models
must be at least two years.
C4. Conventional bank licensees should document these behavioural assumptions in their
liquidity management policy statement. The type of analysis performed under each assumption
should also be documented to facilitate periodic review. The details of that documentation should
be consistent with the significance of the risk and complexity of the analysis.
C5. Senior management should ensure that key assumptions are evaluated at least annually for
reasonableness. Changes in market conditions, competitive environments and strategies would
cause assumptions to lose their validity. Therefore, conventional bank licensees are expected to
evaluate the key assumptions should significant changes occur.
51
C6. The Board of Directors, or its delegated committee, should review key assumptions and their
impact at least annually. The review of key assumptions should include an assessment of the
impact of those assumptions on the institution’s cash flow.
Annex D: Examples of liquidity ratios and limits
D1. Introduction
D1.1 This Annex provides some examples of other liquidity ratios and limits that could be used
internally by conventional bank licensees in managing liquidity risk. Depending on the nature of
business of individual conventional bank licensees, these ratios and limits may not be applicable
to all.
D2. Wholesale borrowing limit
D2.1 Compared with retail deposits, wholesale deposits or liquidity facilities may be considered
a more volatile funding source, given the greater size of individual deposits and the relatively
small number of potential counterparties. To reduce the dependency on funding from the
wholesale market, conventional bank licensees should examine whether there are other funding
products that can diversify or expand their funding base.
D2.2 Wholesale borrowing limits (in individual or all currencies) may be established by
conventional bank licensees to control the level of dependence on such funding. In setting such
limits, a conventional bank licensee should have regard to the depth of the money markets and
counterparties’ perceived credit appetite for the conventional bank licensee.
D3. Undrawn commitments limit
D3.1 To ensure that sufficient funds can be raised to meet drawdowns by customers against
committed lines granted to them, conventional bank licensees should consider setting limits on
undrawn
commitments to customers with reference to their unused wholesale borrowing capacity.
D3.2 For example, if a conventional bank licensee’s wholesale borrowing limit is BD 500
million and the average level of wholesale borrowing has been maintained at around BD 400
million, its undrawn commitment limit may be set at a certain percentage of BD 100 million (i.e.
BD 500 million – BD 400million), depending on the conventional bank licensee’s risk tolerance
and its ability to access additional funding from other sources.
D4. Medium-term funding ratio
D4.1 This is a ratio of liabilities to assets, both with a contractual maturity of, say, more than one
year. This ratio focuses on the medium-term liquidity profile of a conventional bank licensee and
is intended to highlight the extent to which medium-term assets are being financed by the roll-
52
over of short-term liabilities. Conventional bank licensees could establish a minimum mediumterm funding ratio in order to avoid over-reliance on short-term funding.
D4.2 In setting the limit, consideration should be given to the liability structure of a conventional
bank licensee. It may be justifiable for a conventional bank licensee with a stable and sufficiently
diversified deposit base to maintain a lower medium-term funding ratio.
53
B3. Cash-flow analysis of Bank X under normal business conditions (Example 1)
BD equivalent of all currencies (including BD)
(BD Million)
Maturity
2 days
LIABILITIES/ASSETS
Next day
8 days
to
1 month
to
7 days
1 month
to
3 months
3 months
to
6 months
6 months
to
1 year
Over 1 year
Assumptions
Total
Explanations
LIABILITY ITEMS
1
Due to authorized institutions and other banks
of which: Interoffice/intra-group borrowings
Borrowings from other banks in Bahrain and banks
138
656
1,801
161
48
59
28
2,890
69
328
901
1,022
759
932
443
4,455
Contractual
Contractual
outside Bahrain
2.
Behavioural
Deposits
(a)
Demand and savings deposits and current accounts
8
48
183
477
715
1,430
6,401
9,260
(b)
Time, call and notice deposits
27
163
626
1,633
2,449
4,899
22,115
31,913
3.
Negotiable debt instruments issued and outstanding
0
0
33
184
342
216
3,337
4,113
Contractual
4
Other liabilities
53
209
349
157
6
19
190
983
Contractual
5
Sub-total
295
1,404
3,892
3,633
4,319
7,555
32,514
53,614
6.
Off-balance sheet
Core balance (minimum balance of past 12 months)
classified as maturing "over 1 year" Remaining balance is
spread evenly over different time bands within I year.
(a)
Firm commitments
Contractual
408
703
421
134
161
90
0
Based on the payment date for commitments where such a
date has been determined. Based on best estimation for
commitments where only the approximate amount or
1,917
payment date is known.
Behavioural
7.
(b)
Undrawn overdraft and other commitments
4
23
137
228
344
995
0
1,730
(c)
Other payables
7
5
35
90
169
254
0
560
714
2,135
4,486
4,085
4,992
8,895
32,514
57,821
TOTAL LIABILITIES
ASSET ITEMS
8
by customers from past experience.
Contractual
Contractual
Cass
197
6
0
0
0
0
0
Based on estimated date of drawdown of such commitments
Slot all cash holdings into "Next day" column. Slot ca;>h in
transit into other time bands according to the expected date
203
of receipt.
Contractual
9.
Government bills, notes and bonds
10.
Lending to banking sector
I
8
31
39
36
72
281
468
Surplus securities planned to be sold for meeting liquidity
needs should be slotted into time bands according to the
planned selling dates and expected selling prices.
(a)
Due from authorized institutions and other banks
of which: Interoffice/intra-group lending
Lending to other banks in Bahrain and banks
46
470
1,448
390
597
370
72
3,392
23
2,341
7,235
3,509
991
1,199
1,141
16,440
21
124
476
609
563
1,126
4,348
7,266
Contractual
Contractual
outside Bahrain
(b)
Negotiable certificates of deposits and other
Contractual
Same allocation method as in item 9 above
negotiable debt instruments
54
BD equivalent of all currencies (including BD)
(BD Million)
Maturity
LIABILITIES/ASSETS
(c)
Acceptances and bills of exchange held
Next day
17
2 days
S days
1 month
3 months
6 months
to
7 days
to
1 month
to
3 months
to
6 months
to
1 year
8
68
51
9
Over 1 year
3
0
Total
Assumptions
Explanations
Contractual
Allocate according to the maturity date of all claims
However, bills payable at sight should be allocated
156
according to the expected date of receipt of payment
11.
Lending to the non-bank sector
Behavioural
(a)
Overdraft outstanding and loans repayable on
227
439
932
570
121
546
0
estimated date of repayment by customers based on past
deml1nd
(b)
Other loans and advances to customers
Slot the loans into different time bands according to the
2,834
experience.
83
438
1,690
2,280
1,586
1,932
20,968
28,977
Contractual
(c)
Negotiable debt instruments
(d)
Acceptances and bills of exchange held
7
44
169
216
199
399
1,528
2,562
Contractual
Same allocation method as in item 9 above.
Same allocation method as in item l0 (c) above.
5
5
29
45
5
0
0
90
Contractual
Other assets
138
65
60
77
21
5
12
379
Contractual
13.
Sub-total
765
3,949
12,137
7,786
4,128
5,653
28,350
62,767
14.
Off-balance sheets
12.
No prior notice:
Next day
(a)
Standby facilities
0
0
0
0
0
0
0
0
(b)
Other receivables
2
15
70
205
305
562
0
1,158
Require prior notice'
Length of the
notification period
required
Contractual
.0
15.
TOTAL ASSETS
767
3,964
12,207
7,991
4,433
6,215
28,350
63,926
16.
NET POSITION
52
1,829
7,721
3,905
-560
-2,680
-4,164
6,104
17.
CUMULATIVE NET POSITION
13,508
12,948
10,268
6,104
6,104
18.
LIMITS ON NEGATIVE CUMULATIVE NET
POSITION FOR ALL CURRENCIES
52
1,882
9,603
-2,000
-2,500
-4,000
.0
55
B4. Cash-flow analysis of Bank X under an institution-specific crisis scenario (Example 2)
(Daily deposit run-off assumed to be 10%)
((BD
Million)
Closin
g
balanc
e
1st
day
Runoff/Discount
ed
2nd
day
Runoff/Discount
ed
value
3rd
day
value
[Toda
y T]
Runoff/Discount
ed
4th
day
value
T+1
Runoff/Discount
ed
5th
day
value
T+2
Runoff/Discount
ed
6th
day
Runoff/Discount
ed
value
T+3
7th
day
Runoff/Discount
ed
value
T+4
Over
7
days
value
T+5
Beyon
d T+6
T+6
LIABILITIE
S
1 Customer
deposits
1.1
Connected
deposits
1.2 Pledged
deposits
190
607
1.3 Other
deposits
40,376
1.4 Total
41,173
2 Due to
banks
2.1 Bank
vostro
balances
2.2 Bank
borrowings
0
0%
0
4,038
0%
0%
0
10%
4,03
8
700
a.
Connected
banks
b. Other
counterparti
es
2.3 Total
3,454
203
3
Negotiable
debt
instrument
s issued
0
0%
0%
0
10%
4,03
8
4,03
8
4,038
700
Total cash
outflow:
0
100%
0
0%
0
0%
0
10%
4,03
8
0%
0
0%
0
0%
0
0%
0%
0
0%
0
0%
0
0%
607
10%
4,03
8
10%
12,11
3
0%
0
4,038
0%
0
4,038
0%
0
0
2,627
Contractual
3,190
108
7,344
1,011
0
28
765
0
1
161
5,378
3,433
0
0
0
0
0
0
0
3,433
Contractual
Contractual
N.A.
5,04
8
Contractual
Contractual
4,03
8
Contractual
Contractual
4,06
5
Contractual
Contractual
4,80
2
Contractual
1
0%
106
Contractual
190
12,91
0
4,038
1
Contractual
0
10%
4,038
0
Contractual
265
10%
4,03
8
500
Contractual
10
0
4,03
8
18
Contractual
0
0%
4,03
8
0
Contractual
0
Contractual
4,03
8
Contractual
56
Contractual
4,039
Contractual
2,752
Contractual
4,199
21,72
1
56
ASSETS1
4 Cash
203
203
5 Due from
banks
5.1 Bank
nostro
balances
5.2 Bank
placements
429
429
2,798
0
16,605
3,803
a.
Connected
banks2
b. Other
counterparti
es
5.3 Total
100%
100%
0
0
4,233
390
351
1,376
0%
0
0
0
0%
0%
0
189
Contractual
19,832
0%
0
0%
0%
0
479
Contractual
0
0
0%
0%
0
366
Contractual
0
0
0%
0%
0
889
Contractual
0
0
0%
0%
0
600
Contractual
0
0
2,798
13
Contractual
0
Contractual
10,26
5
189
479
366
889
600
13
13,06
2
90%
0
0
0
0
0
0
0
1,238
90%
0
0
0
0
0
0
0
1,431
1,073
75%
0
0
0
0
0
0
0
1,295
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
876
6
Securities3
6.1
Exchange
Fund Bills
and Notes
("EFBN")
6.2
Securities
eligible for
rediscount
at the
Discount
Window
(other than
EFBN)
6.3 Other
HKD
investment
grade
securities
6.4 US
Treasuries &
other AAA
rated USD
securities
6.5 Other
USD
investment
grade
securities
6.6 Other
securities
1,10
1
85%
4,929
0
3,45
0
70%
876
0
0%
0
57
10,296
2,662
4,55
1
Total cash
inflow:
N.A.
7,09
8
Daily net
cash
balance
N.A.
6.7 Total
Cumulative
net cash
balance
0
0
0
0
0
876
4,74
1
479
366
889
600
13
13,93
8
2,05
0
703
3,58
6
4,43
6
3,14
9
3,439
4,185
7,783
2,05
0
2,75
3
-833
5,27
0
8,41
8
11,85
7
16,04
3
23,82
6
Notes:
(1) Exclude all pledged assets as no cash inflow is expected.
(2) No repayment from connected banks is assumed as the entities in the same group are also affected by the crisis and hence have to retain liquidity themselves.
(3) The lower of the market value and the book value of the securities should be reported as the "closing balance".
B5. Cash-flow analysis of Bank X under a general market crisis scenario (Example 3)
(Daily deposit run-off assumed to be 5%)
(BD Million)
Closin
g
1st
day
balan
ce
Run-
2nd
day
off/Discoun
ted
value
[Tod
ay T]
LIABILITI
ES
1
Customer
deposits
1.1
Connected
deposits
1.2 Pledged
deposits
1.3 Other
deposits
Run-
3rd
day
off/Discoun
ted
value
T+1
Run-
4th
day
off/Discoun
ted
value
T+2
Run-
5th
day
off/Discoun
ted
value
T+3
Run-
6th
day
off/Discoun
ted
value
T+4
Run-
7th
day
off/Discoun
ted
value
T+5
Run-
Over
7
days
off/Discoun
ted
value
Beyon
d T+6
T+6
190
0
0%
0
0%
0
0%
0
0%
0
0%
0
0%
0
0%
190
607
0
0%
0
0%
0
0%
0
0%
0
0%
0
0%
0
0%
607
40,376
2,01
9
5%
2,01
9
5%
2,01
9
5%
2,01
9
5%
2,01
9
5%
2,01
9
5%
2,01
9
5%
26,24
4
58
1.4 Total
41,173
2,01
9
700
700
100%
0
0%
0
0%
0
0%
0
0%
0
0%
0
0%
0
3,454
203
Contractual
0
Contractual
18
Contractual
500
Contractual
0
Contractual
1
Contractual
106
Contractual
2,627
3,190
108
Contractual
0
Contractual
10
Contractual
265
Contractual
0
Contractual
1
Contractual
56
Contractual
2,752
7,344
1,01
1
3
Negotiabl
e debt
instrumen
ts issued
3,433
0
Total cash
outflow:
N.A.
3,02
9
203
203
429
429
2,798
0
16,605
3,80
3
2 Due to
banks
2.1 Bank
Nostro
balances
2.2 Bank
borrowings
a.
Connected
banks
b. Other
counterpart
ies
2.3 Total
2,01
9
2,01
9
0
Contractual
0
2,01
9
28
Contractual
2,01
9
0
2,01
9
765
Contractual
2,04
7
0
2,01
9
0
Contractual
2,78
3
0
2,01
9
1
Contractual
2,01
9
0
27,04
1
161
Contractual
2,02
0
0
5,378
Contractual
2,18
0
3,433
35,85
3
ASSETS1
4 Cash
5 Due
from
banks
5.1 Bank
nostro
balances
5.2 Bank
placements
a.
Connected
banks2
b. Other
counterpart
ies
5.3
Interbank
lending not
repaid at
maturity3
(380)
100%
100%
0
0
0%
0%
0
Contractual
170
(17)
0
0
0%
0%
0
Contractual
431
(43)
0
0
0%
0%
0
Contractual
329
(33)
0
0
0%
0%
0
Contractual
800
(80)
0
0
0%
0%
0
Contractual
599
(60)
0
0
0%
0%
0
Contractual
12
(1)
0
0
2,798
Contractual
10,45
9
615
59
5.4 Total
19,832
3,85
2
153
388
296
720
539
11
13,87
2
390
0
293
75%
0
0
0
0
0
0
1,376
0
963
70%
0
0
0
0
0
0
1,431
0
715
50%
0
0
0
0
0
0
1,295
0
0
1,03
6
80%
0
0
0
0
0
4,929
0
0
3,45
0
70%
0
0
0
0
0
876
0
0
0
0%
0
0
0
0
876
10,296
0
1,97
1
4,48
7
0
0
0
0
876
Total cash
inflow:
N.A.
4,05
6
2,12
4
4,87
5
296
720
539
11
14,74
8
Daily net
cash
balance
N.A.
1,02
6
105
2,82
8
2,48
7
1,29
9
1,48
1
2,16
9
21,10
5
1,02
6
1,13
2
3,96
0
1,47
3
174
1,30
7
3,47
7
24,58
2
6
Securities
4
6.1
Exchange
Fund Bills
and Notes
("EFBN")
6.2
Securities
eligible for
rediscount
at the
Discount
Window
(other than
EFBN)
6.3 Other
HKD
investment
grade
securities
6.4 US
Treasuries
& other
AAA rated
USD
securities
6.5 Other
USD
investment
grade
securities
6.6 Other
securities
6.7 Total
Cumulativ
e net cash
balance
60
Notes:
(1) Exclude all pledged assets as no cash inflow is expected.
(2) No repayment from connected banks is assumed as the entities in the same group are also affected by the crisis and hence have to retain liquidity themselves.
(3) It is assumed that 10% of the interbank lending is not being repaid at maturity.
(4) The lower of the market value and the book value of the securities should be reported as the "closing balance".
61
Annex E: The Monthly Return of Liquidity Position of a Conventional Bank
Licensee & the related completion instructions
LIQUIDITY POSITION OF A CONVENTIONAL BANK LICENSEE
*LOCAL OFFICE(S)/CONSOLIDATED RETURN
For the month of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Delete where inapplicable. Branches of foreign banks are required to report this return showing the liquidity position of the Bahrain office(s) only.
Name o f Conventional bank Licensee
Date of Submission
The return should be submitted to the Central Bank of Bahrain not later than 14 days after the last day of
each calendar month, unless otherwise advised by the CBB .
Note: This return is to be prepared in accordance with the completion instructions issued by the CBB
We certify that this return is, to the best of our knowledge and belief, correct.
Chief Accountant
Name
Chief Executive
Name
Name and telephone number of responsible person who may be contacted by the CBB in case of any query.
Name
TelephoneNumber
62
-2PART I − LIQUIDITY RATIO
1.
LIQUIDITY POSITION AS AT THE LAST DAY OF THE MONTH
(BD ′000)
Principal
amount
Liquidity
conversion
factor (%)
LIQUEFIABLE ASSETS
Weighted
amount
Of which
BD + US$
Other currencies
(1) Currency notes and coins
(2) Gold
100
100
(3) (a) Total one-mo n t h liabilities of relevant banks to the Conventional bank Licensee
100
(b) Total one-mo n t h liabilities o f the Conventional Bank Licensee to relevant banks
(c ) The amount, if any, by which the total one-month liabilities of the conventional bank
licensee to relevant banks are exceeded by t h e total one-mo n t h liabilities of relevant banks
to it [ (3)(a)-(3 )(b)≥ 0 ]
(4) prescribed instruments as below(a)bonds, bills and sukuk issued or guaranteed by−
( i ) Government of Bahrain, or the CBB – with a remaining maturity of
(A) not more t h a n 1 year
(B) more than 1 year
( ii ) senior debt instruments issued by a licensed bank incorporated in Bahrain
with a remaining term to maturity of −
(A) not more than 1 month
100
100
100
95
100
(B) more than 1 month but not more than 1 year
95
(C) more than 1 year
90
(b) with a credit rating of AA- or above, issued or guaranteed by −
( i ) the central bank or central government of any country with a remaining term to
maturity o f (A) not more t h a n 1 year
100
(B) more than 1 y e a r
95
63
-3(BD ′000)
LIQUEFIABLE ASSETS (CONTINUED)
Principal
amount
Liquidity
conversion
factor (%)
Weighted
amount
Of which
BD + US$
Other currencies
( ii ) a relevant bank, other than one included in item (4)(a)(ii), with a remaining term
to maturity o f −
(A) not more than 1 mo n t h
100
95
(B) more than 1 month but not more t h a n 1 year
90
(C) more than 1 year
(c) any other items specifically approved for inclusion by the CBB
80
(5) Eligible loan repayments
80
( 6 ) DEDUCTION:
(a) Debt securities with a remaining term to maturity of
not more than 1 month issued by the concerned conventional bank licensee
100
(b)
Treasury stock or equities issued by controllers of the concerned bank
100
TOTAL LIQUEFIABLE ASSETS AFTER DEDUCTION
QUALIFYING LIABILITIES
Principal
amount
Of which
BD + US$
Other currencies
(7) The amount, if any, by which the total one-month liabilities o f relevant banks to the conventional bank licensee are exceeded by
its total one - month liabilities to relevant banks [ ( 3 )(b)-(3 )(a)>0]
( 8 ) The total of its other one-mo n t h liabilities
(9) TOTAL QUALIFYING LIABILITIES
(10) LIQUIDITY RATIO (weighted amount of item (9) /principal amount of item (12))
%
2. AVERAGE LIQUIDITY RATIO FOR THE MONTH
(BD ′000)
Average liquefiable assets ( A )
Average qualifying liabilities ( B )
Average liquidity ratio (A/B)
%
64
3.
LOWEST LIQUIDITY RATIO DURING THE MONTH
3a. Any other days when liquidity ratio below 25%
Date: (dd/mm/yy)
Date: (dd/mm/yy)
%
%
4.
AMOUNT OF PLEDGED DEPOSITS EXCLUDED FROM ITEM (11) OF PART I.1
PART II - SUPPLEMENTARY INFORMATION (FOR POSITION AS AT THE END OF THE MONTH)
(BD′000)
1. INTER-OFFICE/INTRA-GROUP TRANSACTIONS INCLUDED IN PART I .1
Within 7 days
8 days to 1 month
To t a l
CLAIMS ON
Head Off ice and overseas offices
Connected licensed banks in Bahrain
Connected banks outside Bahrain
Total claims
LIABILITIES TO
Head Off ice and overseas off i c e s
Connected licensed banks in Bahrain
Connected banks outside Bahrain
Total liabilities
NET CLAIMS/(LIABILITIES)
2.
DEPOSITS FROM CONNECTED CUSTOMERS
65
3. BACK-TO-BACK INTRAGROUP TRANSACTIONS INCLUDED IN THE COMPUTATION OF LIQUIDITY RATIO
(Supplementary sheets may be attached if space provided is insuff icient)
Claims
Liabilities
Counterparty
Amount
Interest
rate
Maturity date
(dd/mm/yy)
Indicator
Remarks
Amount
Interest rate
Maturity date
(dd/mm/yy)
Total
4. IRREVOCABLE STANDBY FACILITIES AND LARGE DEPOSITS
(Supplementary sheets may be attached if space provided is insuff icient )
A. Facilities received from banks
Name
Type of
facilities
Limit
(BD′000)
Expiry d a t e
(dd/mm/yy)
Amount drawn
(BD′000)
Secured ( S ) o r
unsecured ( U )
66
Total
B. Facilities given to other bank licensees
Name
Type of
facilities
Limit
(BD′000)
Expiry d a t e
(dd/mm/yy)
Amount drawn
(BD′000)
Secured ( S ) o r
unsecured ( U )
Amount
As % of total
Total
C. 10 largest deposits from non-bank customers
Customers
67
(BD′000)
non-bank
deposits
As % of total
non-bank
deposits
Secured ( S ) o r
unsecured ( U )
Total
D. 10 largest borrowings from conventional bank licensees (other than head office and overseas branches)
Conventional Bank Licensees
Amount
(BD′000)
68
Total
5. FOREIGN CURRENCY ASSETS AND LIABILITIES MATURING WITHIN THREE MONTHS
A.
Maturing within 3 months
(BD’000)
(i) On-balance sheet foreign currency assets
(ii) Off -balance sheet foreign currency assets
( iii) On-balance sheet foreign currency liabilities
( iv ) Off-balance sheet foreign currency liabilities
B.
Maturing within 3 months
(BD’000)
( i ) On-balance sheet foreign currency assets (adjusted)
69
Completion Instructions
Monthly Return of Liquidity Position of a Conventional Bank Licensee
Introduction
This return captures information on institutions’ liquidity ratio and funding sources. This
information will be used to monitor institutions’ compliance with the prudential liquidity
requirements issued by the CBB These completion instructions should be read in
conjunction with the Liquidity Risk Management Module issued by the CBB
concerning its approach on supervision of liquidity risk of Conventional Banks
licensees
Section A: General Instructions and Reporting Principles
1.
All conventional bank licensees are required to complete this return showing the
position of their Bahrain office(s) for each month. The return should be submitted
to the Central Bank of Bahrain (―CBB‖) not later than 14 days after the end of
each month.
2.
Locally incorporated conventional bank licensees, as advised by the CBB, may be
required to complete an additional return on the consolidated position of their
Bahrain office(s) and certain overseas branches and subsidiaries. This return
should be submitted to the CBB not later than 21 days after the end of each month
or at a deadline otherwise approved by the CBB.
3.
If the submission deadline falls on a public holiday, it will be deferred to the next
working day.
4.
Amounts should be shown to the nearest thousand in BD or BD equivalent in the
case of foreign currency items. The closing middle market T/T rates prevailing at
the close of business on the reporting date should be used for conversion
purposes.
5.
―Weighted amounts‖ should be calculated by multiplying the principal amount of
an item by the Liquidity Conversion Factor (―LCF‖) assigned to it. Weighted
amount under the ―BD + US$‖ and ―Other currencies‖ columns should be
calculated by multiplying the principal amounts of an item in these currencies by
the relevant LCF.
6.
―Remaining term to maturity‖ should be classified in accordance with the
following illustrative examples:
70
Reporting Date
Remaining term to Maturity
31.1.94
28.2.94
Period Covered
29.2.94*
30.4.94
not more than 7 days
1.2.94 7.2.94
1.3.94 7.3.94
1.3.94 7.3.94
1.5.94 7.5.94
8 days to 1 month
8.2.94 28(29*).2.94
8.3.94 28.3.94
8.3.94 29.3.94 3
8.5.94 0.5.94
not more than 1 month
1.2.94 28(29*).2.94
1.3.94 28.3.94
1.3.94 29.3.94
1.5.94 30.5.94
more than 1 month but
not more than 1 year
1.3.94 31.1.95
29.3.94 28.2.95
30.3.94 28.2.95
31.5.94 30.4.95
not more than 1 year
1.2.94 31.1.95
1.2.95 31.1.99
1.3.94 1.3.94 28.2.95
28.2.95
29.2.95* or 1.3.95 - 1.3.95 28.2.99
28(29*).2.99
1.5.94 30.4.95
1.5.95 30.4.99
1.2.99
onwards
29.2.99* or 1.3.99 1.3.99
onwards
onwards
1.5.99
onwards
more than 1 year but
not more than 5 years
more than 5 years
*Assuming 29 days in February
7.
Un-matured securities transactions and repo/reverse repo should be reported
according to the treatments presented in Annex 1 to these instructions. The
treatments are based on the impact of these transactions on the liquidity position
of the reporting institution within one month. Market makers of Exchange Fund
Bills/Notes and other Specified Instruments should however report their positions
according to the specific completion instructions for item 5(a)(i) below. Where
the Market Makers enter into repo transactions with CBB through the Discount
Window, they should report these transactions as recommended in Annex 1.
8.
―Specified Instruments‖ refer to those specified in Schedule 1 of the Sale and
Repurchase Agreement with the CBB .
Section B: Specific Instructions
Item
Part I.1
(2)
(3)
(3)(a)
Description
Gold
This includes gold coins and gold bullion beneficially owned by the
reporting institution.
Total ―one-month liabilities‖ due from/due to relevant banks
Report in this sub-item claims on relevant banks maturing within 1 month.
This would include forward deposits due to be placed by relevant banks
71
(3)(b)
with the reporting institution within 1 month except those also maturing
within 1 month from the reporting date. Claims under marketable debt
securities or prescribed instruments held should be reported in item (4) of
Part I.1.
Report in this sub-item liabilities to relevant banks maturing within 1
month. This would include forward deposits due to be placed by the
reporting institution with relevant banks within 1 month except those also
maturing within 1 month from the reporting date. This would also include
the contingent liabilities as referred to in the definition of item (8) below.
Debt securities with a remaining term to maturity of not more than 1
month issued by the reporting institution and interest payable thereon
should be included in item (6a) of Part I.1. Amounts of interest payable
and interest receivable which are due within 1 month in respect of claims
on and liabilities to relevant banks should also be included in the
calculation of the net ―one month liabilities‖ to relevant banks.
Intragroup back-to-back transactions
Intragroup back-to-back transactions refer to those inter-office or intragroup transactions which typically involve two legs, one borrowing long
(at more than 1 month's maturity) and the other lending short (at a
maturity of not more than 1 month). Both legs of the transactions are for
the same or similar amount and at the same or similar rate of interest and
are, in most cases, rolled forward continuously. There may be no actual
movement of funds.
In the case of a branch of a foreign bank, the CBB may approve a claim
under a back-to-back transaction for liquidity purposes if the following
conditions are met:
(a)
the foreign bank is an international bank whose liquidity is
managed, and supervised, on an integrated global basis;
(b)
the transaction is carried out with the head office of the foreign
bank; transactions with sister branches outside Bahrain should not
be included;
(c)
the transaction has been accounted for and settled in the same way
as other interbank transactions entered into in the normal course of
business;
(d)
there are no doubts about the liquidity of the head office;
(e)
the head office has confirmed, in terms acceptable to the CBB, that
the effect of the transactions is to provide genuine liquidity to the
branch even in the event of funding difficulties affecting the bank
as a whole;
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(f)
in the case of transactions of material size, the home supervisor has
confirmed to the CBB that it is aware of the transaction and its
purpose and has no objection to it.
The CBB will approach the home supervisor for a confirmation where
necessary. As a general rule, back-to-back transactions will be regarded as
material if the liquidity ratio of the institution would drop below 30% after
excluding such transactions from the calculation of the ratio.
Amounts of interest payable and interest receivable in respect of claims on
and liabilities to relevant banks due within 1 month should also be
included in this item.
(4)
Prescribed instruments
Report the amount of any securities or instruments eligible for inclusion in
this item which the reporting institution may receive within 1 month either
by maturity or by realisation in the secondary market.
(4)(a)(i)
CBB T-Bills, bonds and sukuk and other specified
Licensees should report their positions in these instruments in accordance
with the following instructions:
(a) the long and short positions of such instruments with a remaining term
to maturity of not more than 1 year should be offset against one other;
(b) the long and short positions of such instruments with a remaining term
to maturity of more than 1 year should similarly be offset against one
other;
(c) if the net positions in both (a) and (b) above are long, they should be
reported in sub-items (4)(a)(i)(A) and (4)(a)(i)(B) respectively;
(d) if the net positions in (a) and (b) are in the opposite direction (i.e. one
is long and the other is short), the long position should be reduced by the
amount of the short position on a dollar for dollar basis. The resultant net
long position, if any, should then be reported in the appropriate time band.
(4)(a)(ii)
Securities or instruments issued by the controllers, of the reporting bank or
the head office or sister branches of a conventional bank licensee
incorporated overseas should not be included in this sub-item. They may
be included in sub-items (4)(b)(ii) or (4)(c) if they meet the criteria for any
of these sub-items.
(4)(b)
The qualifying credit rating as specified below, relates to individual
securities or instruments rather than the issuers of such securities or
instruments. However, marketable debt securities which do not have an
individual qualifying credit rating but which are issued or guaranteed by
73
the central government or central bank of a country which has a qualifying
credit rating should be included in item (4)(b)(i)
qualifying credit rating" () means either(a) a credit rating appraised by a credit rating agency set out in column 1
of the following Table and which is not lower than(i) in the case of long-term rating, the rating specified in column 2 in
relation to that credit rating agency; and
(ii) in the case of short-term rating, the rating specified in column 3 in
relation to that credit rating agency:
Column 1
TABLE
Column 3
Column 2
Credit rating agency
Long-term rating
Short-term rating
Moody's Investors Service, Inc.
A2
Prime-1
Standard and Poor's Corporation
AAA-1;
Or
(b) a rating appraised by a credit rating agency approved by the CBB and
considered as a rating equivalent to a rating in that Table
(4)(c)
Marketable debt securities or prescribed instruments approved for
inclusion by the CBB
Conventional bank licensees with any of the following securities may
report them in this sub-item:
(i) unrated securities issued or guaranteed by the regional or local
governments of a country which has a qualifying credit rating;
(ii) unrated securities issued by any institution which are re-discountable
with the central bank of a country which has a qualifying credit rating;
(iii) unrated securities issued or guaranteed by a relevant bank which has a
qualifying credit rating; and
(iv) any other securities from time to time approved by the CBB for
inclusion in this item.
(5)
Eligible loan repayments
Report in this item repayments of loans, including the principal and
interest receivable which fall due within 1 month, by customers other than
relevant banks.
For the purpose of this item, a loan will be regarded as fully performing if
there are no arrears of principal or interest. Where the payment date(s) of
principal or interest of a loan has been ―rescheduled‖, including the rollover of a loan on its original due date or the negotiation of a loan of its
74
payment terms in advance of maturity, the loan can still be regarded as
fully performing provided that:
(a) the rescheduling of payment dates is not caused by a deterioration in
the financial position of the borrower or of his ability to meet the
original repayment schedule; and
(b) the revised payment terms are not ―non-commercial‖ to the authorized
institution.
In the case of loans repayable by installments at intervals of not more than
1 month (e.g. residential mortgage loans, hire purchase loans and personal
loans), they will still be regarded as fully performing if there is no
installment which is overdue for more than 1 month on the reporting date.
Loans falling due within one month that have revolving features, i.e.
where the reporting institution has a commitment to provide finance to its
customer under a facility on an on-going basis, should not be included in
this item. However, such revolving loans can be included as eligible loan
repayments when both the revolving loan and the facility are due to
mature or expire within one month and there is no commitment, either
verbally or in writing, that the facility will be renewed.
For repayments of loans which are secured by deposits pledged with the
reporting institution, their reporting principles are based on a cash flow
concept. The following table illustrates how the loan repayments and the
pledged deposits, both of which are due within 1 month, should be
reported.
Scenarios
liabilities
L=D
L>D
L<D
Amount to be included in
Eligible Loan Repayment
1-month
(A)
R-D
-
(A)
D-L
(B)
R*
R*
R*
(B)
D-L
(A)
= in the case of a loan, including a loan to be repaid by installments, the
outstanding balance of which will be fully repaid within 1 month
(B)
= in the case of a loan the outstanding balance of which will not be fully repaid
within 1 month
L
= outstanding balance of the loan
D
= amount of the pledged deposit
R
= repayment(s) of the loan due within 1 month
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*
= to the extent that the repayments will not be used to reduce the amount of the
deposit or interest payable thereon.
Where the pledged deposit matures beyond 1 month, a repayment of the loan due within
1 month can be included as eligible loan repayment.
(6)
Prescribed instruments issued or treasury stock
Report the amount of any such securities or instruments with a remaining
term to maturity of not more than 1 month issued by the reporting
institution and interest payable thereon.
They can also be treated in the same way as interbank borrowings if the
institution can demonstrate to the CBB that alternative funding will be
available from specific lines of credit standby facilities provided by a third
party relevant bank in the event of a failure to refinance.
Interest payable within 1 month on debt securities or prescribed
instruments issued by the reporting institution which are maturing in more
than 1 month should be reported in item (3)(b) of Part I.1 if they are held
by relevant banks, or item (8) of Part I.1 if they are held by customers
other than relevant banks. Where a reporting institution cannot identify the
holders of the debt securities or prescribed instruments, the information
should be reported in item (8) of Part I.1.
Qualifying liabilities
(7)
Total net ―one-month liabilities‖ to relevant banks
If the reporting institution's ―one-month liabilities‖ to relevant banks
exceed the latter's ―one-month liabilities‖ to it, i.e. where item (3)(b) of
Part I.1 is greater than item (3)(a) of the same Part, report the net ―onemonth liabilities‖ to relevant banks in this item.
(8)
Other one-month liabilities
Report in this item deposits and other liabilities payable including interest
payable within 1 month to customers other than relevant banks. ―Other
liabilities‖ include the reporting institution's irrevocable commitments to
provide funds on a known date of draw down within 1 month or
irrevocable standby facilities which are at call or have a notice period
within 1 month. This would include a commitment to pay under
contingent liabilities, e.g. a call on the institution to meet its undertaking
under a guarantee. Commitments to provide funds which can be
unconditionally cancelled (such as credit facilities for overdrafts) should
be excluded.
Pledged deposits, to the extent of the outstanding balance of the loan
which is secured by them, should be excluded from this item. Deposits
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which have been pledged with the reporting institution to secure offbalance sheet items should be included as qualifying liabilities except to
the extent that they are pledged to secure such items which are also
included as qualifying liabilities.
Amounts due to third parties (customers or brokers) when the reporting
institution has sold or bought securities on behalf of clients for which the
settlement date is not yet due should be excluded from this item. Similarly,
the corresponding receivables (from brokers or clients) should not be
included as liquefiable assets. Exclusion from liquefiable assets and
qualifying liabilities is also applicable to the account receivables and
payables arising from the margin trading deals which are valued but
unsettled. These refer to margin trading positions which the customer has
not given instructions to close out. The margin deposits should however be
included as qualifying liabilities where appropriate.
Part I.2
Average liquefiable assets and qualifying liabilities
These should be calculated by dividing the sum of the weighted amounts
of liquefiable assets, or the sum of qualifying liabilities, as the case may
be, which are maintained by the reporting institution at the close of
business on each working day during a month by the number of working
days during that month.
Part I.3
Lowest liquidity ratio during the month
This should be the lowest liquidity ratio recorded at the close of business
on a working day, or specified day and the last calendar day of the month,
as the case may be, during the month covered by the return.
Part II.1
Inter-office/Intra-group transactions included in Part I.1
―Connected Licensed banks‖ and ―connected overseas bank‖ include any such bank
which is for the time being a shareholder controller subsidiary, associate or affiliate of the
reporting bank Liquidity management framework
Part II.2
Deposits from connected counterparties
―Connected customers‖ include any non-bank customer who is for the
time being:
(a) a subsidiary, associate or affiliate of the reporting bank;
(b) a controller of the reporting bank (as defined in section -5 of the
General Requirement Module); or
(c) a director of the reporting institution and his associates
Part II.3
Back-to-back transactions included in the computation of liquidity ratio
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Report in this part details of back-to-back transactions which have been
included in the computation of the liquidity ratio. The two legs of a backto-back transaction should be reported on the same row.
In the ―Indicator‖ column, insert a letter ―A‖ under the following
situations:
(1) where the reporting bank has an option to call for repayment before the
contractual maturity with a period of notice of not more than 7 days; or
(2) where the residual maturity of the claim is not more than 7 days.
For other situations, insert a letter ―B‖.
Part II.4
A&B
Part II.4
C&D
Part II.5
A&B
In this part, report irrevocable standby facilities received from/given to
conventional bank licensees.
In this part, different deposits from the same non-bank customer and
different borrowings by the same bank should be aggregated. Deposit
from non-bank customers may be identified by account/customer
numbers. Use of a different number from that applied to the same client in
a previous return must be indicated and cross referenced.
For the purpose of this part, borrowings and deposits from the CBB should
be regarded as deposits from banks.
Foreign currency assets and liabilities maturing within three months
Report in this part on-balance sheet and off-balance sheet assets and
liabilities that are: (i) denominated in foreign currencies (including US$);
and (ii) falling due within 3 months according to the remaining period to
maturity at the reporting date or where the cash flow arising therefrom is
expected to be received or disbursed within 3 months of the reporting date.
Unless otherwise specified, book value should be used for reporting
purposes. The remaining period to maturity should be counted by
reference to calendar days from the reporting date. Any item maturing on
a non-business day should be regarded as maturing on the succeeding
business day.
The following items should be excluded from this part:
- assets and liabilities which do not have any maturity date and do not
involve any cash movement (e.g. intangible assets, prepayments and
unearned income); and
- assets which are non-performing or overdue for more than 1 month.
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A(i)
On-balance sheet foreign currency assets
Refer to assets that correspond to those reported in foreign currencies (i.e.
US$ and Other currencies) .For the purpose of this item, all assets that are
payable on demand (including demand loans and overdrafts outstanding)
are regarded as maturing within 3 months.
Report Government bills, notes and bonds and other negotiable debt
instruments according to their remaining maturity.
Report other assets (e.g. bills payable at sight and cash and gold in transit)
according to their known or estimated date of receipt.
A(ii)
Off-balance sheet foreign currency assets
Include in this item all irrevocable standby facilities for which a
commitment fee has been paid by the reporting conventional bank licensee
and no prior notice or a notification period of not exceeding 3 months is
required for using the facilities.
Include any other inflow of funds for which the payment date is within 3
months and the amount is known and has not been included elsewhere,
e.g. interest receipts on existing claims which have not been accrued and
receivables from the contracted sale of assets, exchange contracts, interest
rate contracts and equity contracts. Contra items such as those relating to
letters of credit or foreign exchange contracts should be excluded.
A(iii)
On-balance sheet foreign currency liabilities
Refer to liabilities that correspond to those reported in foreign currencies
(i.e. US$ and Other currencies) .Unless otherwise indicated, liabilities
should be reported under this item according to their earliest maturity. For
deposits, this means the first rollover date or the shortest period of notice
required to effect a withdrawal. All liabilities payable on demand (e.g.
demand, savings and current account deposits) should therefore be
included.
Report negotiable debt instruments issued by the reporting conventional
bank licensee and which are still outstanding according to the earliest date
of redemption if the holder has an option to redeem the instrument before
maturity.
Report other liabilities (e.g. dividend payments or tax liabilities) according
to their known or estimated payment dates.
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A(iv)
Off-balance sheet foreign currency liabilities
Include in this item the principal amount of any irrevocable commitments
or contracts (e.g. loan commitments) which involve an outflow of funds
by the reporting conventional bank licensee and of which the payment
date is within 3 months. Irrevocable commitments to provide funds under
overdraft accounts, on demand or with a notice period of up to 3 months
should also be included.
Include the reporting conventional bank licensees’ obligation to pay under
contingent liabilities such as guarantees and underwriting commitments if
the payment date is within 3 months and the amount can be ascertained.
The reporting conventional bank licensees’ liabilities arising from letters
of credit issued and acceptances on trade bills may also be similarly
included to the extent that inward bills or trust receipt loans are expected
to be granted under these letters of credit or acceptances.
Report any other outflow of funds for which the payment date is within 3
months and the amount is known and has not been included elsewhere,
e.g. interest payments or other payments of expenses which are payable
within 3 months but which have not yet been accrued in the accounts and
any payables within 3 months arising from exchange rate contracts,
interest rate contracts and equity contracts.
In any of the above cases, report according to best estimation if only the
approximate amount or payment date is known.
B(i)
On-balance sheet foreign currency assets (adjusted)
The reporting requirements for this item are the same as item A(i) above
except for the reporting of Government bills, notes and bonds, and other
negotiable debt instruments .
Government bills, notes and bonds and other negotiable debt instruments
should be reported in accordance with the following requirements:
- for those with an established secondary market and can be sold for cash
quickly with limited cost penalty, they should be reported at market value
and be regarded as maturing within 3 months irrespective of their
remaining maturity. The secondary market for such instruments should be
deep and well established in which prices are quoted frequently.
- for those without an established secondary market but maturing within 3
months, they should be reported at book value (i.e. same requirement as
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under item A(i) above). Instruments without an established secondary
market and maturing in more than 3 months should not be reported.
Annex 1A
Reporting treatment of un-matured securities transactions and repo/reverse repo
The reporting treatment for securities transactions under various scenarios is presented
below. It should be noted that where there is a reference to the reporting of a qualifying
liability and the liability is due to a relevant bank, the amount shall be set off against
amounts due from relevant banks for reporting purpose.
Un-matured securities transactions
1.
Un-matured purchase
(a)
subject is a liquefiable asset
Report the subject as a liquefiable asset.
Report the corresponding account payable as a qualifying liability.
(b)
subject is not a liquefiable asset
No liquefiable asset can be reported.
Report the corresponding account payable as a qualifying liability.
2.
Un-matured sale
(a)
subject is a liquefiable asset
(b)
The subject cannot be reported as a liquefiable asset since it has been
removed from the reporting institution’s books on the trade day. Report
the corresponding account receivable as a liquefiable asset on the basis of
a net one month liability due from relevant bank or an eligible loan
repayment, depending on the type of counterparty. The possible change in
the amount to be reported due to the different Liquidity Conversion Factor
reflects the change in the ―liquid quality‖ of the asset arising from the
transaction. No qualifying liability arises from the transaction.
subject is not a liquefiable asset
Neither the subject nor the corresponding account receivable can be
reported as a liquefiable asset. A stricter approach is adopted for the sale
of non-liquefiable assets in general (i.e. not restricted to securities)
because the inclusion of such account receivables will basically capture
the sale of any asset pending settlement. This is not in line with the spirit
of the liquidity regime. Non liquefiable assets can be converted to
liquefiable assets by sale only upon the receipt of cash.
No qualifying liability arises from the transaction.
N.B. Items 1 and 2 assumes that the settlement period of the relevant
transaction is within 1 month.
Repo/reverse repo
3.
Repo due to unwind within 1 month
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(a)
repo subject is a liquefiable asset
The repo subject remains in the books of the reporting institution but
cannot be reported as a liquefiable asset since it is regarded as ―collateral‖
to secure a ―deposit‖ and not free from encumbrance. If the cash inflow
(increase in nostro balance) remains in the liquefiable asset form, the
liquidity position will not change significantly because the liquefiable
asset has only changed from one form to another. If however the cash
inflow is utilised to acquire a nonliquefiable asset, the liquefiable assets
will be reduced because a liquefiable asset (the repo subject) has been
exchanged for a non-liquefiable one. This treatment ensures that no extra
liquefiable asset is created.
The corresponding account payable is not reported as qualifying liability
because the future cash outflow will bring in a future liquefiable asset and
the liquidity position in essence does not change (apart from the possible
difference in LCF). In other words, once the account payable is settled, the
repo subject immediately ceases to be ―collateral‖ and can be reported as
liquefiable asset.
In summary, both the repo subject and the account payable arising from
the repo should be excluded from the reporting of liquefiable assets and
qualifying liabilities respectively.
(b)
repo subject is not a liquefiable asset
The cash inflow (increase in nostro balance) may result in a net
increase in liquefiable assets if the funds stay in cash form or are
being utilised to acquire a liquefiable asset because a nonliquefiable asset (the repo subject) has exchanged for a liquefiable
one. If the funds are utilised to acquire a non liquefiable asset,
there will be no net impact on liquefiable assets as the original
subject is also a non-liquefiable asset.
The corresponding account payable is a qualifying liability because
the cash outflow will not result in a liquefiable asset and there is no
―offsetting‖ effect.
4.
Reverse repo due to unwind within 1 month
The reverse repo subject is effectively regarded as ―collateral‖ pledged by the
counterparty for a loan and remains in the books of the counterparty. The cash
outflow (decrease in nostro balance) will be reflected in the reduction of
liquefiable asset but the corresponding account receivable is a liquefiable asset
either in the form of net one month liabilities due from relevant bank or eligible
loan repayment, depending on the type of counterparty.
82
No qualifying liability arises from the transaction.
5.
Repo due to unwind beyond 1 month
(a)
repo subject is a liquefiable asset
Same consideration of repo subject and cash inflow as in item 3(a).
No qualifying liability arises from the transaction since the corresponding
account payable is only due after 1 month.
(b)
repo subject is not a liquefiable asset
Same consideration of repo subject and cash inflow as in item 3(b).
No qualifying liability arises from the transaction since the corresponding
account payable is only due after 1 month.
6.
Reverse repo due to unwind beyond 1 month
Same as under item 4, report the cash outflow (decrease in nostro balance) as a
reduction of the liquefiable asset. However, the corresponding account receivable
is not a liquefiable asset since it is a claim due beyond 1 month.
No qualifying liability arises from the transaction.
Repo/reverse repo where risks and rewards are substantially transferred to the buyer
The following reporting treatment is to be applied to repo/reverse repo transactions where
securities are sold/purchased subject to a repurchase/resale agreement, the terms of which
transfer substantially all risks and rewards of ownership to the buyer and the transaction
is separately accounted for as an outright sale/purchase and a commitment to
repurchase/sell back. Where the price for the commitment to repurchase/sell back has not
been determined, the fair value (i.e. current market price) as of the reporting date should
be used.
7.
Repo due to unwind within 1 month
(a)
repo subject is a liquefiable asset
As the repo subject is sold under an outright transaction, it should not be
reported as a liquefiable asset. If the cash inflow arising from the sale of
the security (increase in nostro balance) remains in the liquefiable asset
form, the liquidity position will not change significantly because the
liquefiable asset has only changed from one form to another. If however
the cash inflow is utilised to acquire a non-liquefiable asset, the liquefiable
assets will be reduced because a liquefiable asset (the repo subject) has
been exchanged for a non-liquefiable one. This treatment ensures that no
extra liquefiable asset is created.
83
The corresponding commitment to repurchase is not reported as qualifying
liability because the future cash outflow will bring in a future liquefiable
asset and the liquidity position in essence does not change (apart from the
possible difference in LCF).
(b)
repo subject is not a liquefiable asset
The cash inflow (increase in nostro balance) may result in a net increase in
liquefiable assets if the funds stay in cash form or are utilised to acquire a
liquefiable asset because a non-liquefiable asset (the repo subject) has
been exchanged for a liquefiable one. If the funds are utilised to acquire a
nonliquefiable asset, there will be no net impact on liquefiable assets as
the original subject is also a non-liquefiable asset.
The corresponding commitment to repurchase is a qualifying liability
because the cash outflow will not result in a liquefiable asset and there is
no ―offsetting‖ effect.
8.
Reverse repo due to unwind within 1 month
(a)
Reverse repo subject is a liquefiable asset
As the reverse repo subject is purchased under an outright transaction, it
should be reported as a liquefiable asset and the cash outflow arising from
the purchase of the security (decrease in nostro balance) will be reflected
in the reduction of liquefiable assets.
The future cash inflow brought about by the corresponding commitment to
sell back is not reported as a liquefiable asset because it will be offset by
the simultaneous future outflow of the liquefiable reverse repo subject.
(b)
Reverse repo subject is not a liquefiable asset
The cash outflow (decrease in nostro balance) will be reflected in the
reduction of liquefiable assets, as a non-liquefiable asset (reverse repo
subject) is acquired in return.
The future cash inflow brought about by the corresponding commitment to
sell back should be reported as a liquefiable asset either in the form of net
one month liabilities due from relevant bank or eligible loan repayment,
depending on the type of counterparty, provided the conditions in the
Fourth Schedule are fulfilled.
9.
Repo due to unwind beyond 1 month
(a)
repo subject is a liquefiable asset
Same consideration of the outright transaction as in item 7(a).
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No qualifying liability arises from the transaction since the corresponding
commitment to repurchase is only due after 1 month.
(b)
repo subject is not a liquefiable asset
Same consideration of the outright transaction as in item 7(b.)
10.
No qualifying liability arises from the transaction since the corresponding
commitment to repurchase is only due after 1 month.
Reverse repo due to unwind beyond 1 month
(a)
Reverse repo subject is a liquefiable asset
Same consideration of the outright transaction as in item 8(a).
No qualifying liability arises from the transaction.
(b)
Reverse repo subject is not a liquefiable asset
Same consideration of the outright transaction as in item 8(b).
No qualifying liability arises from the transaction.
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Annex F: The quarterly Return on Selected Data for Liquidity Stress-Testing
(Form-2) & the related completion instructions
RETURN ON SELECTED DATA FOR LIQUIDITY STRESS -TESTING
POSITION OF Locally incorporated Conventional bank licenses and Branches of Foreign banks located in the
Kingdom of Bahrain
As a t . . .. . . . . . . . . .. . . . . . . . . .. . . . . . . . . .. . . . . . . . ... .
(last day of the quarter)
*Delete where inapplicable. Branches of foreign banks are required to report this return showing the liquidity position of the Bahrian office(s) only.
Name o f Authorized Institution
Date of Submission
This return should be submitted to the Central Bank of Bahrain not later than 6 weeks after the end of each
quarter ending on 31 March, 30 June, 30 September an d 31 December, unless otherwise advised by the
CBB .
Note: This return is to be prepared in accordance with the completion instructions issued by the CBB
We certify that this return is, to the best of our knowledge and belief, correct.
Chief Accountant
Name
Chief Executive
Name
Name and telephone number of responsible person who may be contacted by the CBB in case of any query.
Name
TelephoneNumber
86
Part I - Cash-flow information
(BD '000)
Closing
balance
1st day
2nd day
3rd day
Maturity
4th day
5th day
6th day
7th day
Over 7 days
LIABILITY ITEMS
1. Deposits from customers
1.1 Deposits from connected parties
1.2 Pledged deposits
1.3 Other deposits
1.4 Total
2. Due to conventional bank licensees
2.1 Conventional bank licensee vostro balances
2.2 Due to conventional bank licensees - connected
parties
2.3 Due to conventional bank licensees - pledged
2.4 Due to conventional bank licensees - other
counterparties
2.5 Total
3. Negotiable debt instruments issued and outstanding
ASSET ITEMS
4. Cash
5. Due from conventional bank licensees
5.1 Conventional bank licensee nostro balances
5.2 Due from conventional bank licensees - connected
parties
5.3 Due from conventional bank licensees - pledged
5.4 Due from conventional bank licensees - other
counterparties
5.5 Total
6. Debt securities held
6.1 Securities eligible for rediscount at the Discount
87
Window (other than EFBN)
6.2 Other BD investment grade securities
6.3 US Treasuries & other AAA rated USD securities
6.4 Other USD investment grade securities
6.5 Other securities
7. Residential mortgage loans
7.1 Other mortgage loans
Part II - Supplementary Information
1. Due to and due from the same counterparty conventional bank licensee
(BD '000)
a. Amount due to the counterparty conventional
bank licensee
Name of counterparty conventional bank licensee
b. Amount due from the counterparty
conventional bank licensee
Total
2. Residential mortgage loans
(BD '000)
Other mortgage loans
(a) Delinquent loans
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Completion Instructions
Return on Selected Data for Liquidity Stress-testing
Introduction
1.
2.
This return collects information on the cash flow position of selected asset and
liability items of reporting conventional bank licensees. The information will be
used in the context of the stress testing as defined by the CBB.
The completion instructions comprise 2 sections. Section A gives instructions on
the general reporting requirements. Section B explains the reporting requirements
for each individual item in the return.
Section A: General Instructions
3.
All conventional bank licensees incorporated in Bahrain are required to complete
this return showing the position of their Bahrain offices and overseas branches as
at the last calendar day of each quarter. The return should be submitted not later
than 6 weeks after the end of each quarter. If the submission deadline falls on a
public holiday, it will be deferred to the next working day.
4.
Unless otherwise indicated, book value should be used for reporting purposes.
Amounts should be shown to the nearest thousands, in BD or BD equivalent in
the case of foreign currency items. The closing middle market T/T rates
prevailing at the reporting date should be used for conversion purposes.
5.
Apart from reporting all items in Part I of the return under the ―Closing balance‖
column, the reporting conventional bank licensees is required to provide the
maturity breakdown of some of the items according to the remaining period of
maturity at the reporting date.
6.
The following should also be noted in respect of the reporting of maturity under
this return:
(a) ―1st day - 7th day‖ means the next 7 business days after the reporting date;
(b) any item payable on demand should be reported under the ―1st day‖ column;
(c) any item callable at notice should be reported according to the length of
notification period required, i.e. an item callable at one day’s notice should be
reported in the ―2nd day‖ column, unless notice has been received or given by
the Bank on the reporting date; and
(d) assets which are overdue or non-performing (defined as assets on which
interest is being placed in suspense or interest accrual has ceased) should be
included in the ―Over 7 days‖ column.
7. For the purpose of this return, connected parties include:
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(a) any controller (as defined in Chapter-5 of the General Requirement Module),
or connected counterparty (as defined in Chapter-5 of the Credit Risk
Module).
Section B: Specific Instructions
Part I
Item
Cash-flow information
Ref Item
LIABILITY ITEMS
1.
Deposits from customers
1.1
Deposits from connected parties
Report total deposits taken from the reporting conventional bank
licensees’s non-bank connected parties (defined in paragraph 7 of Section
A above) in the ―Closing balance‖ column.
1.2
Pledged deposits
Report total deposits that are pledged to the reporting conventional bank
licensees (e.g. for securing credit facilities granted to customers) in the
―Closing balance‖ column. Exclude from reporting under this item any
pledged deposits from connected parties reported under item 1.1 above.
1.3
Other deposits
Report deposits from customers other than those reported under items 1.1
and 1.2 in the ―Closing balance‖ column.
1.4
Total
Report the total amount of items 1.1 to 1.3 in the ―Closing balance‖
column.
2.
Due to bank
2.1
Bank vostro balances
Report vostro balances with other Banks in the ―Closing balance‖ column.
2.2
Due to Bank - connected parties
Report borrowings from other banks that are connected to the reporting
conventional bank licensee (refer definition under paragraph 7 of Section
A above) in the ―Closing balance‖ column.
2.3
Due to banks - pledged
Report borrowings from other banks that are under pledge in the ―Closing
balance‖ column. Exclude from reporting under this item any pledged
interbank borrowings from connected parties reported under item 2.2
above.
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2.4
Due to banks – other counterparties
Report borrowings from other banks other than those reported under items
2.1 to 2.3 in the ―Closing balance‖ column, and slot this amount into
different time bands according to their remaining maturity.
2.5
Total
Report the total amount of items 2.1 to 2.4 in the ―Closing balance‖
column.
3.
Negotiable debt instruments issued and outstanding
Report all negotiable debt instruments issued and outstanding in the
―Closing balance‖ column, and slot this amount into different time bands
according to their remaining maturity. All instruments which can be
redeemed before maturity at the holder’s option should be reported in the
appropriate time bands according to the earliest date of redemption.
Perpetual instruments should be reported under the ―Over 7 days‖ column.
ASSET ITEMS
4.
Cash
Report all cash balances under the ―Closing balance‖ column. In providing
the maturity breakdown of this amount, holdings of all notes and coins
should be reported in the ―1st day‖ column. Where the cash is still in
transit, report it in other time bands according to the expected date of
receipt.
5.
Due from banks
5.1
Bank nostro balances
Report nostro balances with other banks in the ―Closing balance‖ column.
5.2
Due from bank - connected parties
Report placements and advances to other banks that are connected to the
reporting conventional bank licensees (refer definition under paragraph 7
of Section A above) in the ―Closing balance‖ column.
5.3
Due from bank - pledged
Report placements and advances to other conventional bank licensees that
are under pledge in the ―Closing balance‖ column. Exclude from reporting
under this item any pledged interbank placements and advances from
connected parties reported under item 5.2 above.
5.4
Due from conventional bank licensees – other counterparties
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Report placements and advances other than those reported under items 5.1
to 5.3 in the ―Closing balance‖ column, and slot this amount into different
time bands according to their remaining maturity.
5.5
Total
Report the total amount of items 5.1 to 5.4 in the ―Closing balance‖
column.
6.
Debt securities held
This item mainly includes negotiable debt instruments but with the
exclusion of acceptances and bills of exchange.
Securities held by the reporting conventional bank licensees which are not
free from encumbrances, e.g. which are under pledge, repo or reverse
repo, should be excluded from reporting under items 6.1 to 6.5.
Securities held should be slotted into appropriate time bands according to
their remaining maturity. Where the reporting conventional bank licensees
has been notified that a particular security would be redeemed on any day
other than the original maturity day, report the security according to that
other day.
Report securities held using current market values. For securities without a
secondary market, book value should be used. Any short positions in
securities should be reported as negative and slotted into a time band
based on the contractual maturity of that security. If both long and short
positions exist within the same time band, report the net position.
6.1
Securities eligible for rediscount at the Discount Window
Report holdings in such securities in the ―Closing balance‖ column.
6.2 to 6.4
BD and USD investment grade securities
Report holdings in BD and USD investment grade securities in the
―Closing balance‖ column of the respective items, and slot the respective
amounts into different time bands according to their remaining maturity. A
list of credit rating agencies currently recognised by the CBB and the
corresponding minimum acceptable rating for investment grade securities
is attached at Annex 1.
6.5
Other securities
Report holdings in securities other than those reported under items 6.1 to
6.4 in the ―Closing balance‖ column, and slot this amount into different
time bands according to their remaining maturity.
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7.
Residential mortgage loans
This item refers to loans to private individuals for the purchase of
residential properties situated in Bahrain. These residential mortgage loans
should not be subject to any right of set-off in favour of the relevant
mortgagor (i.e. there should be an express prohibition in the mortgage
documentation of any set-off by the mortgagor against his/her payments
under the mortgage loan).
7.1
Other mortgage loans
Report loans secured by mortgages that comply with the criteria at Annex
2 in the ―Closing balance‖ column.
Part II
Supplementary Information
1.
Due to and due from the same counterparty bank
Provide details if the reporting conventional bank licensees has
borrowings from and placements with the same counterparty bank that is
not a connected party. Such borrowings and placements should have
already been included in items 2.4 and 5.4 of Part I respectively.
2.
Residential mortgage loans
(a)
Non-performing loans
Report the total amount of non-performing residential mortgage loans
which are included in item 7.1 separately.
For the purpose of this item, a loan is non-performing if the mortgagor or
borrower has been in default in making payment for more than 90 days.
(b)
Loans in negative equity
Report the total amount of residential mortgage loans in negative equity
which are included in item 7.1 separately. Exclude any loans in negative
equity already included in item (a) above.
Residential mortgage loans in negative equity are defined as those
mortgage loans with an outstanding loan amount with the reporting
conventional bank licensees that exceeds the current market value (CMV)
of the mortgaged property.
In determining the amount of residential mortgage loans in negative
equity, the reporting conventional bank licensee may use a ―best efforts‖
basis to derive the CMV of the mortgaged property, e.g. by application of
available price indices. The frequency of revaluation should preferably be
at least quarterly. This may need to be increased further (e.g. monthly) if
the condition of the property market merits this.
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Annex 1
List of recognised credit rating agencies and minimum acceptable rating for
investment grade securities
Credit rating agency
Minimum acceptable rating
Moody’s Investors Service, Inc.
Baa3
Standard & Poor’s Corporation
BBB-
Fitch,Inc.
BBB-
Rating and Investment Information, Inc.
BBB+
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Annex 2
Mortgage Criteria
The other mortgages (7.1) shall:1. be by way of first fixed legal charge over a residential property situated within
Bahrain;
2. be over property which is to the best of the knowledge, information and belief of the
borrower owner-occupied or occupied by a tenant of the owner;
3. have had a loan to value ratio of not more than 70%, in the case of mortgages loans
secured by other mortgages at the date upon which the relevant mortgage loan was
approved;
4. secure mortgage loans that are borrowed by individual person(s) and not by any other
legal entity.
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Annex G: Mismatch Reporting
(BD '000)
Total
Up to and
including 8
days
From 9
days to one
month
Maturity
Over one month
to 3 months
Over 3 months
to six months
Over 6
months
1. CAPITAL LIABILITIES
1.1 Innovative capital instruments
1.2 Hybrid capital instruments
1.3 Subordinated debt instruments
1.4 Total maturing capital items (1.1 to 1.3
inclusive)
2. NON-CAPITAL LIABILITIES
2.1 Deposits from banks
2.2 Deposits from non-banks
2.3 Certificates of deposits issued
2.4 Debt securities in issue
2.5 Financial liabilities
2.6 Term borrowings
2.7 Securities sold under repos
2.8 Dividend payable
2.9 Interest payable
2.10 Other liabilities
2.11 Total non-capital items (2.1 to 2.10
inclusive)
3. ASSETS
3.1 Cash and balances at central banks
3.2 Placements with banks and similar financial
institutions
3.3 Financial assets at fair value through profit
and loss
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Total
Up to and
including 8
days
From 9
days to one
month
Maturity
Over one month
to 3 months
Over 3 months
to six months
Over 6
months
3.4 Loans and advances to banks and nonbanks
3.5 Held-to-maturity and available-for-sale
investments
3.6 Investment properties
3.7 Interest in unconsolidated subsidiaries and
associated companies
3.8 Interest receivables
3.9 Property, plant, and equipment (PPE)
3.10 Other assets
3.11 Total Assets (3.1 to 3.10 inclusive)
NET MISMATCH
(Items 3.11 less items 1.4 and 2.11)
CUMULATIVE MISMATCH2
Cumulative mismatch as % of Total deposits
(2.11)
2
Note: take the mismatch from the previous period and add to the period in the cell (e.g. take ―up to and including 8 days net mismatch‖
and add to the ―9 days to one month net mismatch‖)
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