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Thematic review of compliance with liquidity policy
In 2021, we conducted our first thematic review into banks' compliance with our liquidity policy, which we introduced in 2010. The review was also an opportunity to gain a deeper insight into banking industry practices relating to the management and monitoring of liquidity risk.
Review report
The liquidity thematic review report covers the findings from the thematic review of banks’ compliance with our liquidity policy (as set out in banking prudential requirement documents, BS13 and BS13A). We published the report in September 2021.
About the review
There are 27 registered banks in New Zealand, 15 locally incorporated banks and 12 branches of overseas incorporated banks. Our review covered all the locally incorporated banks; however, only the 10 largest were chosen for onsite interviews.
Our review was conducted in three parts:
- All banks submitted answers to two surveys covering the quantitative and qualitative requirements and guidelines of the policy. We then analysed the answers and supporting documentation banks provided.
- We interviewed senior management, board members and employees responsible for the implementation, management and oversight of liquidity.
- We did sample testing of liquidity calculation data from the 10 largest, locally incorporated banks while we were conducting interviews.
What the review found
The review identified a range of weaknesses in bank systems, controls and risk management, as well as areas of good practice that the industry can learn from.
Banks are currently maintaining liquidity ratio levels above the regulatory minimums, and comfortably above their own internal limits for risk tolerance.
All banks demonstrated good practices in the following areas:
- having clear organisational structures for liquidity risk management
- using internal limits and measurements beyond the minimum policy requirements
- monitoring cash positions to understand intra-day liquidity need.
Compliance with the policy varied amongst banks but was unrelated to bank size. Many of the issues identified were due to weak internal controls and inadequate care in interpreting the policy.
In general, compliance reflected the maturity of internal risk management frameworks. Areas of non-compliance highlighted gaps in these frameworks, suggesting widespread underinvestment in systems and assurance processes.
Next steps
We have given individual feedback to all 15 banks that participated in the review. The 10 largest, locally incorporated banks have been required to:
- develop a remediation plan to address all of the findings set out in their feedback letters
- conduct a materiality assessment of the impacts of the quantitative findings on the liquidity ratios.
Any material non-compliance with the policy is subject to public disclosure.
We require all 15 of the locally incorporated, registered banks to undertake a self-assessment against the findings in the thematic review report. Our supervisors will be monitoring the remediation plans and self-assessments.
We will be starting a review of the liquidity policy in the first half of 2022. The feedback from banks and the findings from this review will be considered as part of the policy review. There will be further opportunity to provide input during the policy review consultation process.