Liquidity risk management
One of the cornerstones of our liquidity risk management framework is to maintain a comfortable liquidity position, meaning the ability to meet our financial obligations even if we have difficulties in raising any new funding over a longer period. The current credit and liquidity crisis made liquidity risk management even more important. We were able to maintain our sound liquidity position in the difficult times of 2008 due to the prudent and conservative liquidity and funding policy in the past, as well as by diversifying our funding sources. The start of our online retail savings programme NIBC Direct, the start of our covered bond programme and of other secured funding initiatives, as well as a medium-term note issue using the Dutch State’s Credit Guarantee Scheme, were the major new funding initiatives undertaken in 2008. In addition, NIBC was able to enhance the European Central Bank (ECB) eligible funding capacity that created additional liquidity buffers.
The use of ECB funding by NIBC declined towards the end of 2008 and in the beginning of 2009 as a result of the funding initiatives mentioned above. NIBC intends to replace the usage through new government guaranteed issues, as well as by means of online retail savings,
covered bond and other secured funding proceeds. The unused ECB capacity will remain a comfortable liquidity buffer.
Stress scenario
Based on projections prepared by the business units and reviewed by risk management, and the current asset and liability maturity profiles, a stress tested liquidity forecast is prepared and presented once every two weeks to the ALCO, in order to create continuous monitoring of the liquidity position. Note 58 to the Financial Statements provides more details on the assumptions behind the stress test.
The following charts show the strong liquidity buffer in the stress scenario. Although this analysis focuses on the next 12 months, the liquidity buffer in the liquidity stress test remains positive for longer periods.
The available liquidity, as presented in the graphs that follow, is comprised of:
- A projected pool of cash plus collateral suitable for secured funding, minus a buffer for intraday payments, at each month end;
- A reduction to the available pool created by maturing liabilities and other projected outflows (e.g. from new business); and
- An increase in the available pool created by maturing assets, the government-guaranteed issue of February 2009 and a conservative estimate of retail funding proceeds in 2009.
A comparison of the 12-month liquidity stress test at 31 December 2007 with the test at 31 December 2008 shows that the outcome of the stress test after 12 months is positive in both years. The surplus remains positive after a year of severe liquidity stress.
At the end of 2007, a large buffer of cash and collateral for secured funding was available to cover the relatively high amount of expiring funding in 2008. This expiring funding made the liquidity buffer converge to the current level, in line with the expectations at the beginning of 2008. Due to the scheduled additional government-guaranteed issues, the liquidity buffer is expected to rise in the coming year.
In addition to the 12-month liquidity stress analysis above, NIBC also conducts a liquidity analysis over a period of 36 months once every two weeks. This analysis assumes a possible growth in the size of the books in combination with funding initiatives as, for example, certain forms of secured funding. The analysis assumes no ordinary wholesale unsecured funding. The outcome of this 36-month liquidity analysis shows again a positive buffer throughout the period.
Funding
As a result of the current credit and liquidity crisis, the unsecured wholesale funding markets were closed in 2008 for many financial institutions, including NIBC. NIBC, therefore, further diversified its funding base by the initiatives mentioned earlier.
An overview of the funding portfolio as at 31 December 2008 and 31 December 2007 is shown in the following charts.
