ATB Financial - Guidelines

Liquidity is the ability of an institution to generate or obtain sufficient cash or its equivalents in a timely manner at a reasonable price to meet its commitments as they fall due. This guideline indicates some of the elements that will be considered in assessing the strength of ATB Financial’s liquidity management framework and describes some of the information used to assess liquidity. This guideline is consistent with the requirements of the Standards of Sound Business and Financial Practices issued by the Canada Deposit Insurance Corporation and with Guideline B-6 issued by the Office of the Superintendent of Financial Institutions Canada. ATB Financial's issuance of wholesale funding deposits is also subject to section 81 of the Financial Administration Act that requires the Minister of Finance to act as fiscal agent for provincial corporations who issue securities and to the Operating Agreement between ATB Financial and the Ministry of Finance.

ATB Financial must have:

documented liquidity and funding policies and controls approved by the Board of Directors;
ongoing monitoring of liquid assets and funding requirements;
management information systems that are timely and sufficient in their content, format and frequency to adequately manage liquidity;
an analysis of changes to funding requirements under alternative scenarios;
policies on the diversification of funding sources; and
contingency plans.

Liquidity Policies

ATB Financial must establish and implement documented, sound and prudent liquidity and funding policies recommended by senior management, approved by the Board of Directors and reviewed at least annually by the Board or a board committee. Documented liquidity policies should articulate the importance senior management places on liquidity and, ATB Financial’s liquidity goals. In assessing ATB Financial’s implementation of these business practices, attention will be paid to the content and frequency of reports by management and the independent review function of ATB Financial’s compliance with board-approved policies and controls. The choice of analytical tools and the level of sophistication of information systems will in part be implied by the size of ATB Financial, the range and stability of its funding sources and the extent to which it accesses funds in more than one currency, or more than one operating unit.

Managing Liquidity

A sound framework for managing liquidity has three dimensions:

maintaining a stock of liquid assets that is appropriate to ATB Financial’s cash flow profile and that can be readily converted into cash without incurring undue capital losses;
measuring, controlling and scenario testing of funding requirements; and
managing access to funding sources.

Stock of Liquid Assets
High quality securities for which there is a broad and active secondary market can be liquidated through their sale to a wide range of counterparties without incurring a substantial discount, thereby securing their status as dependable sources of cash flow. This requires ATB Financial to establish the credit quality, marketability and market value of those securities it designates as part of its stock of liquid assets. As such, their purpose is to provide ATB Financial with time to access alternative sources of funding, in the event that circumstances giving rise to a liquidity problem are temporary. The liquidity policies of ATB Financial, therefore, must clearly define the role of liquid assets within the overall liquidity management system and establish minimum targets for holdings of liquid assets.

When determining which assets can be included in the stock of liquid assets, policies must consider not only credit quality and marketability, but also the existence of encumbrances that would prevent quick sale to meet unanticipated net cash outflow requirements. This means, for example, that assets pledged to secure specific obligations like overnight advances from a central bank, or margin requirements for trades on a futures exchange, should not be considered part of a stock of liquid assets available for unanticipated net cash outflows.

ATB Financial must actively monitor its pledging of assets to clearing and settlement organizations as part of its ongoing liquidity management program. Pledges of assets for these purposes require special focus because they involve encumbrances on an intra-day basis that are typically released at the end of a settlement cycle. To the extent these assets are included in an end of day measure of liquidity, they should be separately identified. Management must also explicitly address what assumptions it makes about these pledging requirements in the design and documentation of scenario tests of a disruption to the company's funding.

When establishing the minimum targets for the stock of liquid assets, ATB Financial should consider its overall liquidity profile including factors such as asset quality, stability of funding sources, cost and diversity of funding and short-term funding requirements.

The minimum targets for holdings of liquid assets are normally influenced by a number of considerations. For example, the stock of liquid assets will be of greater significance for institutions that have greater reliance on wholesale funding in contrast to institutions that are liability-driven and whose funding base is preeminently retail in its orientation. Wholesale funding comprises deposits and other borrowings raised in money and capital markets either directly or through brokers

Funding Requirements
Analyzing funding requirements involves the construction of a maturity ladder and the calculation of a cumulative excess or deficit of funds at selected maturity dates. Funding requirements are determined by examining future cash flows based on the future behaviour of assets and liabilities and off-balance sheet items including interim cash flows or settlements of financial derivatives, and then calculating the cumulative excess over the time frame for the liquidity assessment. Assessing the funding surplus/deficit requires ATB Financial to consider, among other things:

the amount of liquid assets relative to the surplus/deficit;
the size of the surplus/deficit relative to total funding;
the diversity of funding sources; and
the quality of assets.

The relevant time frame for active liquidity management is short, generally extending out to no more than a few weeks. Institutions active in markets for longer-term assets and liabilities need to use a longer time frame than institutions that are active in short-term money markets. Where wholesale funding in Canadian currency or total foreign currency is greater than 10% of total funding in Canadian and total foreign currency respectively ATB Financial must have internal limits on short-term (e.g., next day, 2-7 days and 8-30 days) funding requirements and actively measure and monitor actual requirements against those limits.

Limits on short-term funding requirements should conform with ATB Financial’s demonstrated capacity to fund in the market at a reasonable price. These limits should apply on a total currency basis and, where material, by currency or currency group. As an example, ATB Financial’s wholesale funding surplus or deficit for a given time period could be defined broadly as comprising the sum of:

maturing money market and other like assets;
assets specifically pledged to secure maturing borrowings of securities and sale and repurchase agreements;
commercial asset repayments with virtual certainty; and
cash inflows arising from off-balance sheet contracts (e.g., forward foreign exchange contracts) where significant

less:

maturing wholesale liabilities including maturing obligations related to borrowings of securities and sale and repurchase agreements;
cash outflows arising from off-balance sheet contracts (e.g., forward foreign exchange contracts) where significant; and
advised draws against loan commitments.

A number greater than 0 is a funding surplus. A number less than 0 is a funding deficit.

Scenario Testing
Evaluating whether ATB Financial is sufficiently liquid depends greatly on the behaviour of cash flows under different conditions. Analyzing liquidity thus entails laying out "what if" scenarios. Scenario testing should be among the measurement techniques used by ATB Financial as part of its contingency planning process.

Two scenarios should be tested: ATB Financial’s "going concern" condition and ATB Financial-specific disruption. The going concern scenario establishes a benchmark for the "normal" behaviour of balance sheet-related cash flows in the ordinary course of business. A liquidity disruption that remains confined to ATB Financial itself provides one type of "worst case" benchmark. Under each scenario ATB Financial would try to include any significant swings in cash flows and funding requirements.

Scenario testing requires ATB Financial to make assumptions about the probable behaviour of the timing of cash flows for each type of asset and liability in the scenario being examined. For each funding source, for example, ATB Financial would have to decide whether the liability would be: (1) repaid in full at maturity; (2) gradually run off over the next few weeks; or (3) virtually certain to be rolled over or available if tapped. The uncertainties involved in making such estimates require a conservative bias toward assigning later dates to cash inflows and earlier dates to cash outflows.

Managing Market Access

ATB Financial must review periodically its efforts to maintain the diversification of liabilities, to establish relationships with liability holders, and to develop asset-sales markets. As a check for adequate diversification of liabilities, ATB Financial needs to examine the level of reliance on individual funding sources by instrument type and provider of funds, and set internal limits on the maximum amount of funds it will accept in the normal course from any one counterparty or any one funding market (e.g., wholesale deposits).

Building strong relationships with providers of funding can provide a line of defense in liquidity management. The frequency of contact and the frequency of use of a funding source are two possible indicators of the strength of a funding relationship and hence their reliability. ATB Financial should establish an ongoing presence in different funding markets and monitor market developments to take anticipatory action such as lengthening its funding profile.

Developing markets for asset sales or exploring arrangements under which ATB Financial can borrow against assets is another element of managing market access. The frequency of use of some asset-sales markets is a possible indicator of the ability to execute sales under adverse scenarios.

Contingency Planning

ATB Financial’s ability to withstand a funding requirement in ATB Financial-specific disruption may also depend on the caliber of its formal contingency plans. Effective contingency plans should consist of several components:

specific procedures to ensure timely and uninterrupted information flows to senior management;
clear division of responsibility within management in a crisis;
action plans for altering asset and liability behaviours (i.e., market assets more aggressively, sell assets intended to hold, raise interest rates on deposit);
an indication of the priority of alternative sources of funds (i.e., designating primary and secondary sources of liquidity);
a classification of borrowers and trading customers according to their importance to the company in order to maintain customer relationships; and
plans and procedures for communicating with the media.

Contingency plans should also include procedures for making up cash flow shortfalls in emergency situations. ATB Financial should have several sources of such funds available, including previously unused credit facilities. The plan should spell out as clearly as possible the sources and amount of funds ATB Financial expects to have available from each source.

For more information, call 1-800-332-8383, or visit any branch of ATB Financial. To locate the branch nearest to you, please use our Branch Locator.