PRA sets out supervisory framework for bank liquidity and funding risks

The Prudential Regulation Authority (PRA) has outlined its supervisory approach to liquidity and funding risks for firms subject to the Capital Requirements Directive (CRD) PRA Rulebook.

This framework is designed to be read in conjunction with several key regulatory documents, including the 'Internal Liquidity Adequacy Assessment' (ILAA) rules, the 'Liquidity Coverage Ratio (CRR)' part of the PRA Rulebook, and the Capital Requirements Regulation (CRR).

The PRA's methodology is also significantly informed by the European Banking Authority's (EBA) guidelines for common procedures and methodologies for the Supervisory Review and Evaluation Process (SREP), specifically Titles 8 and 9, which detail expectations for liquidity and funding risk management.

The authority applies the Liquidity Supervisory Review and Evaluation Process (L-SREP) on both an individual and consolidated basis, aligning with the CRD framework.

This ensures that firms comply with Part Six (Liquidity) of the CRR at both individual and consolidated levels, enabling the PRA to implement supervisory measures effectively across the financial sector.

The statement also clarifies how references to CRR and CRD provisions should be interpreted within domestic law.

The Internal Liquidity Adequacy Assessment Process (ILAAP) mandates firms to identify, measure, manage, and monitor liquidity and funding risks across various time horizons and stress scenarios, consistent with their established risk appetite.

Firms must conduct an ILAAP proportionate to their activities, with Small Domestic Deposit Takers (SDDTs) updating their documents at least every two years, and all other firms annually.

More frequent updates are required if significant changes in business, strategy, or operational environment impact liquidity adequacy.

The PRA expects the ILAAP to be the direct responsibility of a firm's management body, requiring its approval and deep integration into management processes and decision-making culture.

Sound governance processes are crucial for effective Asset and Liability Management (ALM), with senior ALM committees, often chaired by the CEO or CFO, playing a critical role in monitoring compliance, balancing objectives, and allocating resources across business lines.

These committees are expected to monitor forward-looking data and market intelligence.

The PRA stresses proportionality, ensuring governance frameworks align with a firm's nature, scale, and complexity, and provides templates for ILAAP documents, particularly for SDDTs, to guide firms in producing specific, non-formulaic, sound, effective, and comprehensive assessments.