China Banking Regulatory Commission, Guidelines for the Management of Liquidity Risk of Commercial Banks

Promulgated: September 28 2009

Effective: November 1 2009

Applicability: The Guidelines apply to Chinese-invested commercial banks, wholly foreign-owned banks and Sino-foreign equity joint venture banks established within the PRC (Article 2).

The term “liquidity risk” refers to the risk that a commercial bank, despite being solvent, is unable to obtain adequate funds in a timely manner or unable to do so within reasonable costs to handle asset growth or pay matured debts. “Financing liquidity risk” refers to the risk of the inability of commercial banks to meet capital requirements effectively in a timely manner without affecting their routine operations or financial status. “Market liquidity risk” refers to the risk of the inability of commercial banks to obtain funds through sale of assets at reasonable market prices due to insufficient market depth or market fluctuations (Article 3).

Main contents: Directors of a commercial bank shall undertake the ultimate responsibility for managing liquidity risk. They shall be responsible for checking and approving the commercial bank's liquidity risk-bearing ability, the strategy for managing such risks, important policies and procedures, limits on liquidity risk and liquidity risk contingency plans, and shall examine and revise the above at least once a year (Article 9).

In principle, liquidity risk management shall be conducted by currency type. Commercial banks may carry out consolidated management based on the materiality principle (Article 23). Part Three covers liquidity management methods and techniques including the management of the liquidity of assets and liabilities, cash flow management, stress testing and contingency plans (Part Three). Commercial banks shall conduct a regular stress test at least once every quarter (Article 52).

The Appendix lists the internal warning indicators for liquidity risk of commercial banks, which include:

- marked increase in risks as a result of rapid growth of assets;

- increase in the degree of concentration of assets or liabilities;

- growth of currency mismatch;

- reduction in weighted average liability term;

- negative press reports;

- fall in share price or rise in cost of debt;

- rise in the costs of wholesale and retail financing;

- transaction counterparties requesting additional security for credit exposure or refusing to conduct new transactions;

- agencies reducing or cancelling credit lines;

- rise in withdrawal of retail deposits; and

- increase in difficulty in obtaining long-term financing.

Related legislation: PRC Banking Regulation Law (Revised), Oct 31 2006; and PRC Commercial Banking Law (Revised), Dec 27 2003, CLP 2004 No.1 p.4 & May 10 1995, CLP 1995 No.5 p.32