Guidelines on the Internal Liquidity Adequacy Assessment Plan (ILAAP)

Stress-Testing Banks should conduct a comprehensive, robust stress-testing that is consistent with SAMA Stress-testing Rules , taking into consideration the following: i. The impact of a range of severe but plausible stress scenarios on the bank’s cash flows, liquidity resources, profitability, solvency, asset encumbrance and survival horizon. ii. Selecting stress scenarios that reveal the vulnerabilities of the bank’s funding. In addition to performing a tailored and in-depth review of the bank’s vulnerabilities, capturing all material risks on an institution-wide basis that result from the bank’s business model and operating environment in the context of stressed macroeconomic and financial conditions. The review should be conducted on a yearly basis and more frequently, when necessary, depending on individual circumstances. On the basis of this review, the bank is required to define an adequate stress-testing programme for both normative and economic perspectives. As part of the stress-testing programme, the bank is required to determine adverse scenarios to be used under both perspectives, taking into account other stress-tests it conducts. iii. Conducting reverse stress-testing in a proportionate manner. iv. Continuously monitoring and identifying new threats, vulnerabilities and changes in its environment to assess whether its stress-testing scenarios remain appropriate and, if not, adapt them to the new circumstances. v. Regularly updating the impact of the scenarios. In the case of material changes, the bank should assess its potential impact on its liquidity adequacy. The degree of conservatism of the stress-testing scenarios adopted and assumptions made by the bank should be discussed in the ILAAP document. 5.6 Review and Independent Validations The ILAAP shall be subject to a regular internal review, at least once a year, taking into consideration the following: i. Both qualitative and quantitative aspects, including, for example the use of ILAAP outcomes, the stress-testing framework, risk capture, and the data aggregation process. ii. Establishing a defined process to ensure proactive adjustment of the ILAAP to any material changes that occur, such as entering new markets, providing new services, offering new products, or changes in the structure of the bank. iii. Adequately back-testing and measuring the performance of the ILAAP outcomes and assumptions, covering, for example, liquidity planning, scenarios, and risk quantification. iv. Conducting a regular independent validation of the ILAAP risk quantification methodologies, taking into account the materiality of the risks quantified and the complexity of the risk quantification methodology. The overall conclusions of the validation process should be reported to Senior Management and the Board of Directors, used in the regular review and adjustment of the quantification methodologies, and taken into account when assessing liquidity adequacy.