Liquidity risks
Definition
Liquidity risk is the risk of being unable, or only partially able, to meet current or future payment obligations. This also includes intraday liquidity risk, market liquidity risk and refinancing cost risk.
Refinancing cost risk is the risk that future refinancing funds can only be raised on unexpectedly less favourable cost terms or that surplus liquidity has to be invested on unexpectedly less favourable terms.
Risk assessment and management
The objectives of liquidity management are to ensure solvency at all times, even under stress conditions, to optimise the refinancing structure and to coordinate own issuances in the money and capital markets. For this purpose, Rentenbank has implemented an appropriate Internal Liquidity Adequacy Assessment Process (ILAAP).
Within the ILAAP, liquidity risks are backed by liquidity coverage potential or liquid assets. The starting point for measuring liquidity risk is cumulative net liquidity demand, which is also assessed under various stress scenarios. Cumulative net liquidity demand is compared with the liquidity coverage potential available at the relevant point in time (liquidity buffer). Utilisation is assessed across short-, medium- and long-term horizons and is subject to limits. In accordance with MaRisk, the potential utilisation of liquidity coverage potential is explicitly determined for periods of one week and one month.
The stress scenarios are used to assess the impact of unexpected, extraordinary events on the liquidity position and on market liquidity risk. The scenarios comprise a market-wide scenario involving a decline in securities prices (market liquidity) as well as liquidity outflows resulting from cash collateral to be posted. In addition, an idiosyncratic scenario is simulated that assumes the simultaneous drawdown of all irrevocable loan commitments and the default of significant borrowers. The scenario mix simulates the cumulative occurrence of the liquidity stress scenarios. Event-driven liquidity stress tests are also performed where risk-relevant events occur. The composition and appropriate diversification of liquidity coverage potential are reviewed as part of validation.
In addition, the regulatory liquidity ratios, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), are calculated and limited.
The scenario mix has been defined as the management-relevant scenario and, through a traffic-light system, ensures the minimum survival horizon.
Short-term as well as medium- and long-term liquidity limits are monitored and reported on a daily basis.
The actual liquidity position and utilisation of the liquidity buffer, as well as a 90-day forecast of net liquidity demand in accordance with the LCR, are monitored daily. The remaining internal and regulatory metrics are calculated and monitored monthly.
Interbank funds, reverse repos under Eurex GC Pooling, ECP issuances and open market operations with Deutsche Bundesbank are available as instruments for managing the short-term liquidity position. In addition, securities may be purchased for liquidity management purposes. Funding with maturities of up to two years may be raised through the Euro Medium-Term Note Programme (EMTN programme), promissory notes, global bonds and domestic capital market instruments. Bonds issued by Rentenbank are classified in the EU as “liquid assets” in accordance with the LCR. Rentenbank bonds may also be held as high-quality liquid assets in other jurisdictions (for example, the United States and Canada).
As in the previous year, liquidity was secured at all observation dates during the reporting year, including under stress assumptions. All liquidity limits and regulatory liquidity ratios were complied with by a comfortable margin. The average LCR was 3.85 (4.15) and the average NSFR was 1.30 (1.32).
Funding cost risks are measured as part of the risk inventory and validation process. During the reporting year, they remained below the internally defined materiality threshold.