U.S. federal banking regulators issued a policy statement Wednesday setting out new principles for funding and liquidity risk management.

The policy statement summarizes the principles of sound liquidity risk management that they have issued previously, and also incorporates principles issued by the Basel Committee on Banking Supervision.

It notes that financial market turmoil of the past couple of years “illustrate that liquidity risk management at many financial institutions is in need of improvement. Deficiencies include insufficient holdings of liquid assets, funding risky or illiquid asset portfolios with potentially volatile short-term liabilities, and a lack of meaningful cash flow projections and liquidity contingency plans.”

The guidance reiterates the process that institutions should follow to appropriately identify, measure, monitor, and control their funding and liquidity risk. “In particular, the guidance re-emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal well-developed contingency funding plan as primary tools for measuring and managing liquidity risk.”

These processes and plans should also be well documented and available for supervisory review, it notes, adding, “Failure to maintain an adequate liquidity risk management process will be considered an unsafe and unsound practice.”

IE