Liquidity risks

Definition

Liquidity risk refers to the risk of not being able to meet current or future payment obligations or only to a limited degree. This also includes intraday liquidity risk, market liquidity risk, and funding cost risk.

Funding cost risk refers to the risk that future funding resources could only be raised or a liquidity surplus would have to be invested under unexpectedly worsened cost conditions.

Risk assessment and management

The objectives of liquidity management are to ensure the Bank’s ability to meet its financial obligations at all times, also under stress conditions, to optimise the funding structure, and to coordinate the Bank’s own issues in the money market and capital markets. To achieve these objectives, Rentenbank has implemented a suitable Internal Liquidity Adequacy Assessment Process (ILAAP).

In the ILAAP, liquidity risks are backed by liquidity coverage potential in the form of liquid assets. The starting point for the measurement of liquidity risk is the cumulative net liquidity requirement, which is also considered under different stress scenarios. The liquidity coverage potential on hand at the given point in time (liquidity buffer) is checked against the cumulative net liquidity requirement. The utilisation rate is considered over short-term, medium-term, and long-term horizons and limits are set on each such utilisation rate. In accordance with the MaRisk, the potential utilisation of the liquidity coverage potential is explicitly calculated for periods of one week and one month.

Stress scenarios are employed for the purpose of analysing the effects of unexpected, unusual events on the Bank’s liquidity position and market liquidity risk. The scenarios include a market-wide scenario involving a decline in the prices of securities (market liquidity) and liquidity outflows for cash collateral. In addition, an idiosyncratic scenario involving simultaneous calls of all irrevocable credit commitments and default on the part of important borrowers is simulated. This scenario mix is used to simulate the cumulative occurrence of liquidity stress scenarios. Liquidity stress tests are also conducted on an ad-hoc basis when risk-relevant events occur. The composition and appropriate diversification of the liquidity coverage potential are checked as part of the validation process.

The regulatory liquidity ratios Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are calculated and limited as well.

The scenario mix is defined as a management-relevant scenario. The minimum survival horizon is assured by the use of a traffic light system.

The short-term, medium-term, and long-term liquidity limits are monitored and reported on a daily basis.

The current liquidity position and liquidity buffer utilisation rate, as well as a 90-day forecast of the net liquidity requirement expressed in the LCR, are monitored on a daily basis. The other internal and regulatory ratios are calculated and monitored on a monthly basis.

The instruments available for the purpose of managing the short-term liquidity position are interbank funds, ECP placements, and open market operations with the Bundesbank. In addition, securities can be purchased for liquidity management purposes and funds maturing in up to two years can be raised by way of the Euro Medium-Term Note programme (EMTN programme), promissory notes, and global bonds or domestic capital market instruments. The bonds issued by Rentenbank are classified in the EU as “liquid assets” in the sense of the LCR. Rentenbank’s bonds may be held as highly liquid assets in other jurisdictions as well (exempli gratia, United States and Canada).

As in the previous year, the Bank’s liquidity was assured at every date considered in the reporting period, also under stress assumptions. All liquidity limits and regulatory liquidity ratios were comfortably kept. The average LCR was 4.15 (3.89) and the average NSFR was 1.32 (1.34).

Funding cost risks are measured as part of the risk inventory and validation process. They were below the internally defined materiality limit in the reporting period.