Liquidity is the amount of money that is readily available to a business. This includes cash and assets that can be quickly sold at a reliable price. Liquidity risk crystallises when a business is unable to meet its financial obligations as they fall due, this might lead to loss of confidence in a business, and in severe cases, default. Retail banks play a crucial role in the financial system, taking in deposits, facilitating payments and lending to individuals and businesses. The majority of deposits are short-term, while a large proportion of lending is in long-term residential mortgages which can extend out to 30 years. This leaves banks vulnerable to liquidity risk which needs to be managed.
Following the Global Financial Crisis, the Reserve Bank drafted the ‘Liquidity Policy’ (BS13) and ’Liquidity Policy Annex: Liquid Assets’ (BS13A) in recognition that bank liquidity is essential to the smooth functioning of the financial system and to mitigate the risk of future liquidity problems disrupting the financial system. This was consulted on in 2009 and introduced on 1 April 2010.
Southland Building Society’s (SBS) Conditions of Registration 11 and 12 requires SBS:
- to calculate the one-week mismatch ratio, the one-month mismatch ratio and the one-year core funding ratio in accordance with the methodology prescribed in BS13 and BS13A; and
- establish an internal framework for liquidity risk management that is adequate in the bank’s view for managing the bank’s liquidity risk at prudent levels.
The most recently issued BS13 and BS13A was in July 2022.
The Reserve Bank's Liquidity Thematic Review, published in 2021, and an independent PWC review of SBS’s liquidity models and associated governance and controls framework in 2022 identified a number of quantitative areas of technical non-compliance where SBS was not calculating the ratios in accordance with BS13, breaching its Conditions of Registration.
The Reserve Bank has assessed the findings of non-compliance with BS13 against the materiality factors outlined in the Guidance on reporting by banks of breaches of regulatory requirements, published in January 2021 and decided that they do not individually constitute a material breach of SBS’s Conditions of Registration 11.
While a few of the individual areas of non-compliance resulted in adverse movements in the ratios, the individual and collective impact on the ratios were not significant considering that at no time has SBS been close to breaching its internal and/or minimum regulatory limits.
However, when assessing breaches for materiality the Reserve Bank undertakes a consolidated assessment of the findings and has concluded that the findings of non-compliance with BS13 do collectively constitute a material breach of Conditions of Registration 11. Although the liquidity ratios remained well above regulatory minimum requirements, the Reserve Bank considers that collectively the number of individual breaches of Conditions of Registration 11 raise prudential concerns as they are all in relation to a matter that is of the same nature.
SBS has remediated the majority of the findings and continues to work with the Reserve Bank on resolving those remaining.
At 30 June 2023, SBS is compliant with the Reserve Bank’s liquidity metric requirements. SBS’s liquidity position can be viewed on the Bank Financial Strength Dashboard.