Intragroup liquidity risk management 1 General

9.1.1 Where an AI is part of a banking group (local or foreign), the AI should be abl e to monitor and c ontrol liquidity risks arising from intragroup transactions (including cross-border transactions where applicable) with other legal entities in the group, taking into account any legal, regulatory, operational or other constraints on t he transferability of liquidity and collateral to and from those entities.

9.1.2 In managing intragroup liquidity risks, AIs should understand how their liquidity positions may be affected by liquidity problems faced by other group entities. For example, an A I may be required to extend support to group entities that experience liquidity problems, while the funding provided by other group entities to the AI may be w ithdrawn in an em ergency situation. A lso, a localised liquidity problem originating in a group entity may lead to a liquidity strain across the whole group due to reputation contagion (i.e. when market counterparties assume that a problem at one entity implies a pr oblem for the group as a whole).

9.2 Treatment of intragroup transactions

9.2.1 AIs should specify in their liquidity risk management strategy the treatment of intragroup liquidity and assumptions on i ntragroup dependencies for the purposes of making cash-flow projections.

9.2.2 AIs may treat normal intragroup transactions (i.e.

intragroup placements and bor rowings transacted at arm’s length) in the same way as other third party transactions for the purpose of cash-flow projections under normal business conditions, provided that there is

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no doubt about the financial position of the banking group as a whole.

9.2.3 In assessing funding needs (especially under stressed situations), AIs should account for any funding or liquidity commitment provided to group entities (e.g. in the form of explicit guarantees or funding lines to be drawn in times of need) and prepare for any withdrawal of funding provided by group entities. A Is should also analyse how the liquidity positions of group entities may affect their own liquidity, either through direct financial impact or through contagion when those entities encounter liquidity strain. W here there is reliance on funding support from group entities, AIs should take steps to identify the existence of and take into account any legal, regulatory or other limitations that may restrict their access to liquidity from those entities in case of need (see subsection 9.4).

9.2.4 For the avoidance of doubt, an AI that has entered into back-to-back transactions³⁰ with its group entities should exclude such transactions from cash-flow or liquidity calculations, as such transactions usually involve no actual movement of funds and hence cannot effectively improve the AI’s liquidity.

9.3 Intragroup liquidity limits

9.3.1 AIs should establish internal limits on intragroup liquidity risk to mitigate the risk of contagion from other group entities when those entities are under liquidity stress.

AIs may also establish specific limits to avoid over reliance on funding provided by their branches and group members operating outside Hong Kong.

Moreover, AIs should consider setting stricter internal limits on intragroup funding denominated in foreign currencies where the convertibility and transferability of such funding is not certain, particularly in stressed

30 These transactions 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.

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situations. S ee section 6 for more details on f oreign currency liquidity management.

9.3.2 In the course of risk-based supervision, the HKMA may monitor the level and t rend of AIs’ intragroup transactions, and may consider setting supervisory limits to control intragroup exposures if the HKMA has significant concerns about the prudence of the exposure levels, especially when the financial and liquidity position of the group is in doubt.

9.4 Constraints on intragroup liquidity transfers

9.4.1 AIs should understand potential constraints that may affect intragroup liquidity movements, and specify their assumptions regarding the transferability of funds and collateral in liquidity risk management policies. Thes e assumptions should fully consider regulatory, legal, accounting, credit, tax and i nternal constraints on t he effective movement of liquidity and c ollateral. The HKMA may review the reasonableness of such assumptions in the course of risk-based supervision.

9.4.2 AIs should also consider the operational arrangements needed to transfer funds and c ollateral across entities and the time required to complete such transfers under those arrangements.

9.5 Reputation contagion

9.5.1 To mitigate the potential for reputation contagion, it is of vital importance that AIs engage in effective communication with credit rating agencies, major counterparties and o ther stakeholders when liquidity problems in their group entities arise. Group-wide contingency funding plans, liquidity cushions and diversified funding sources are mechanisms that AIs may use to mitigate reputation contagion. Detailed supervisory guidance on these aspects is contained in SPM module RR-1 “Reputation Risk Management”.

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9.6 Group-wide liquidity risk management (for local banking groups)

9.6.1 In addition to the above provisions, an AI heading a local banking group should actively monitor and control liquidity risks on a gr oup basis (including all of its branches and associated entities in its consolidated group), by incorporating processes that aggregate data across multiple systems in a jurisdiction (and across jurisdictions) to develop a gr oup-wide view of liquidity risk exposures.

9.6.2 AIs should clearly document their policies and l imits established for group entities and any internal liquidity support arrangements provided to such entities. The policies should also address how the liquidity positions of the entities are monitored and c ontrolled by senior management at the head office in Hong Kong.

9.6.3 For each jurisdiction in which they are active, AIs should ensure that they have the necessary expertise concerning the jurisdiction-specific features of the legal and regulatory regime that influence liquidity risk management, including arrangements for dealing with failed banks, deposit insurance and c entral bank operational frameworks and collateral policies. Thi s knowledge should be r eflected in AIs’ liquidity risk management processes.

9.6.4 Where there is a localised systemic stress event, AIs should have processes in place to allow for the allocation of liquidity and collateral resources to affected entities, to the extent that transferability is permitted.

10. Intraday liquidity risk management