Guidelines on the Internal Liquidity Adequacy Assessment Plan (ILAAP)

Internal Models: Pillar 1 and ILAAP Comparisons Should the internal models vary from any regulatory methodologies approved for LCR and NSFR purposes, this section would provide a detailed comparison explaining both the methodological and parameterization differences between the internal models and the regulatory models and how those affect the liquidity measures for ILAAP purposes. Further, the explanation of the differences between results of the internal models for LCR, NSFR would be set out at the level at which the ILAAP is applied. SAMA would expect the explanation to be sufficiently granular to show the differences at the level of each of the Pillar 1 risks. 8. Details on Models Employed In this section, banks should present the list of models utilized in the formulation of the ILAAP, giving relevant and appropriate details as given below: i. The key assumptions and parameters within the liquidity modeling work and background information on the derivation of any key assumptions. ii. How parameters have been chosen including the historical period used and the calibration process. iii. The limitations of the model. iv. The sensitivity of the model to changes in the key assumptions or parameters chosen. v. The validation work undertaken to ensure the continuing adequacy of the model. vi. Whether the model is internally or externally developed. If externally acquired, its generic name and details on the model developer. vii. The extent of its acceptance by other regulatory bodies, users in the international treasurers’ community, overall reputation and market acceptance. viii. Specific details on the applications within the bank. ix. Major merits and demerits of the chosen models. x. Results of the model validation obtained through: - Back testing / Scenario testing. - Analysis of the internal logic. xi. Major methodologies or statistical technique used, i.e. Value at risk models, employing methods such as variance/co-variance, historical simulation and Monte Carlo method. xii. Confidence levels embedded for regulatory liquidity or economic liquidity purposes. xiii. Data definition, i.e. whether the source is external or internal and if any data, manipulation of external data has been done for it to conform to the internal data. 9. Liquidity Specific Stress-Testing In this section, banks should undertake, at least, the following: i. Analyse the internal liquidity risk stress-testing framework, including the process and governance of and challenge to scenario design, derivation of assumptions and design of sensitivity analysis, and the process of review and challenge and relevance to the risk appetite. ii. Scrutinise the process by which the stress results are produced, and incorporated into the risk framework and strategic planning, and the liquidity recovery process. iii. Analyse the results and conclusions, with breakdown by each relevant risk driver. Details of further stress-testing requirements are in Annexure (1) . 10. Liquidity Transferability Between Legal Entities In this section, banks should provide details of any restrictions on the management's ability to transfer liquidity during stressed conditions into or out of the businesses covered. These restrictions, for example, may include contractual, commercial, regulatory or statutory nature. A regulatory restriction could be the minimum liquidity ratio acceptable to SAMA. 11. Aggregation and Diversification This section should describe how the results of the various risk assessments are brought together and an overall view taken on liquidity adequacy. At the general level, the overall reasonableness or the detailed quantification approaches might be compared with the results of an analysis of liquidity planning and a view taken by senior management as to the overall level of liquidity that is appropriate. In aggregating the risks, the following aspects of the aggregation process should be described: i. Any allowance made for diversification, including any assumed c