The Process of Liquidity Supervision

Patrick de Neef

While most of this book is dedicated to explaining what liquidity risk is and how we could attempt to manage it, this chapter provides the reader with insight into the process of liquidity management and its implementation. It provides tips and tricks as well as key issues to keep in mind when designing, reviewing or updating the overall process of liquidity risk management and supervision. Regardless of whether you are reading this as bank employee responsible for design, implementation and oversight or as a banking supervisor, the goal is the same: establishing a well-controlled process at the bank to manage liquidity and funding risks.

ILAAP and SREP

The two main terms relevant for the management and supervision of liquidity risk beyond Basel III are the internal liquidity adequacy assessment process (ILAAP) and the supervisory review and evaluation process (SREP).

As the “I” in ILAAP stands for “internal”, while the “S” in SREP stands for “supervisory”, the key message is that the ILAAP is owned by the bank, and the SREP by the supervisor. The bank can use the moment (usually once a year) it reports to its supervisor on ILAAP to show the supervisor that it is in control