Governance of liquidity risk management
A bank should clearly articulate a liquidity risk tolerance that is appropriate for the business strategy of the organisation and its role in the financial system.
10. A bank should set a liquidity risk tolerance in light of its business objectives, strategic direction and overall risk appetite. The board of directors is ultimately responsible for the liquidity risk assumed by the bank and the manner in which this risk is managed and therefore should establish the bank's liquidity risk tolerance. The tolerance, which should define the level of liquidity risk that the bank is willing to assume, should be appropriate for the business strategy of the bank and its role in the financial system and should reflect the bank's financial condition and funding capacity. The tolerance should ensure that the firm manages its liquidity strongly in normal times in such a way that it is able to withstand a prolonged period of stress. The risk tolerance should be articulated in such a way that all levels of management clearly understand the trade-off between risks and profits. There are a variety of qualitative and quantitative ways in which a bank can express its risk tolerance. For example, a bank may quantify its liquidity risk tolerance in terms of the level of unmitigated funding liquidity risk the bank decides to take under normal and stressed business conditions. As discussed in Principle 14, supervisors will assess the appropriateness of the bank's risk tolerance and any changes to the risk tolerance over time.