Thematic review of bank liquidity identifies areas for improvement

The Reserve Bank of New Zealand - Te Pūtea Matua has undertaken a thematic review of banks’ compliance with our liquidity policy, identifying a range of system, controls and risk management weaknesses as well as areas of good practice that the industry can learn from.

The Liquidity Policy was created in 2010 to promote financial stability in the wake of the 2007-2008 Global Financial Crisis (GFC), Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand says.

“Bank liquidity is essential to the smooth functioning of the financial system, and it needs to be managed carefully to prevent liquidity problems disrupting the financial system.

“Our review covered all 15 locally incorporated banks and onsite interviews with the largest ten.

It was positive that we found that banks are currently maintaining liquidity ratio levels above the regulatory minimums, and comfortably above their own internal risk tolerance limits. However, sometimes liquidity positions were more favourably reported than could be justified,” Mr Bascand says.

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 policy interpretation. 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.

“There is a risk that this extends beyond liquidity management. Banks must resolve their system limitations and enhance their risk governance and management approach,” Mr Bascand says.

Manager Industry Insights & Thematics Rupert Barber says it is pleasing to see banks have started addressing these issues and many findings have already been remediated.

“Areas of industry-wide good practice included clear organisational structures for liquidity risk management; banks using internal limits and measurements beyond the minimum Policy requirements; and monitoring cash positions to understand intra-day liquidity needs,” Mr Barber says.

“We are grateful for all the time, energy and effort the banks and their staff put into working with us on this review. The information provided and their openness when engaging with us was hugely valuable.”

We plan to commence a review of the liquidity policy in the first half of 2022. The feedback and findings from our thematic review will help inform this. We look forward to further constructive engagement with the industry and other interested parties during this process.

More information:

• Liquidity thematic review report (PDF 1.2MB)
• Liquidity thematic review

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