A Liquidity Risk Management Framework is an integral part of risk management within all banks. The framework should ensure that liquidity risk is well managed to minimize the likelihood of a liquidity stress occurring at a bank and its impact when it occurs

The Central Bank believes that liquidity risk governance, measurement and management is equally important and complements the quantitative requirements.

When reviewing the liquidity framework, the Central Bank will apply a proportionate approach which will take into account the size of the bank, scope of operations, interconnectedness, and its possible impact on the UAE financial system.

A robust Liquidity Risk Management Framework should incorporate the following requirements:

1. Banks are responsible for managing their liquidity risk in a prudent manner using all available liquidity management tools at their disposal.
    
2. The bank’s Board of Directors bears ultimate responsibility for liquidity risk management within the bank.

   The bank’s Board should clearly articulate liquidity risk tolerance for the bank in line with the bank’s objectives, strategy and overall risk appetite.

3. Board members should familiarize themselves with liquidity risk and how it is managed. At least one board member should have a detailed understanding of liquidity risk management.
    
4. Senior management is to develop strategies, policies and practices to manage liquidity risk in accordance with the board of directors' approved risk tolerance and ensure that the bank maintains sufficient liquidity.
    

   The bank's liquidity management strategy should be continuously reviewed and compliance should be reported to the board of directors on a regular basis.

5. A bank must incorporate liquidity costs, benefits and risks into the product pricing and approval process for all significant business activities.
    
6. A bank must have sound processes and systems for identifying, measuring, monitoring and controlling liquidity risk in a timely and accurate manner.
    
7. A bank must establish a forward-looking funding strategy that provides effective diversification in the sources and tenor of funding.
    
8. A bank must establish a liquidity risk management framework including limits, warning indicators, communication and escalation procedures. The framework should be shared with the Central Bank upon request.
    
9. A bank must conduct its own internal liquidity stress tests on a regular basis for a variety of institution specific and market wide stress scenarios (individually and in combination). The scenarios should be based on the individual bank specific circumstances and business model.
    

   A bank should use its internal stress testing outcomes to adjust its liquidity risk management strategies, policies and position and develop effective contingency funding plans.

   The scenarios and results of the stress tests should be shared with the Board of Directors on a regular basis and the Central Bank upon request.

10. A bank must have a formal contingency funding plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations. The CFP should be shared with the Central Bank upon request.
     
11. A bank must maintain an adequate cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios.
     
12. A bank is required to develop a transfer-pricing framework to reflect the actual cost of funding. The sophistication of the framework should be commensurate with the bank’s liquidity risk tolerance and complexity.