Liquidity Risk Management at DBS Liquidity Management and Funding Strategy

7 LIQUIDITY RISK DBS’฀liquidity฀risk฀arises฀from฀its฀obligations฀to฀honour฀withdrawals฀of฀deposits,฀repayments฀of฀borrowed฀funds฀at฀maturity,฀and฀ commitments฀to฀its฀customers฀to฀extend฀loans.฀ We฀seek฀to฀manage฀our฀liquidity฀in฀a฀manner฀that฀ensures฀that฀our฀liquidity฀obligations฀would฀continue฀to฀be฀honoured฀under฀normal฀ as฀well฀as฀adverse฀circumstances.

7.1 Liquidity Risk Management at DBS Liquidity Management and Funding Strategy

DBS฀strives฀to฀develop฀a฀diversiied฀funding฀base฀with฀access฀to฀funding฀sources฀across฀retail฀and฀wholesale฀channels.฀The฀Group’s฀funding฀ strategy฀is฀anchored฀on฀strengthening฀our฀core฀deposit฀franchise,฀which฀constituted฀91฀of฀total฀funding฀sources฀as฀at฀31฀December฀2014.฀ Strong฀and฀sustainable฀growth฀of฀our฀customer฀deposit฀base฀in฀retail,฀wealth฀management,฀corporate฀and฀institutional฀segments฀across฀the฀ markets฀that฀we฀operate฀in,฀is฀key฀to฀extending฀our฀long-term฀funding฀advantage.฀ Liabilities and Equity Assets Others Loans฀and฀Advances฀ to฀Customers Bank฀and฀Corporate฀ Securities฀ Due฀from฀Banks Government฀ Securities฀and฀T-bills Cash฀and฀Balances฀ with฀Central฀Banks Total฀Equity Other฀Liabilities Subordinated฀฀ Term฀Debts Other฀Debt฀ Securities฀ Deposits฀and฀ Balances฀from฀ Customers Due฀to฀Banks LoanDeposit฀ Ratio฀87 9 8 7 7 62 72 7 10 9 4 4 1 Customer฀Deposits Wholesale฀Funding Other฀Debt฀Securities Commercial฀Papers Senior฀Medium฀Term฀Notes Negotiable฀Certiicates฀of฀Deposits Funding Sources SGD million Wholesale Funding Breakdown SGD million 5000 10000 15000 20000 25000 30000 2014 50000 100000 150000 200000 250000 300000 350000 91 9 7 93 17 3 5 34 46 53 24 18 2014 2013 2013 To฀complement฀core฀deposits,฀DBS฀has฀also฀focused฀on฀broadening฀our฀access฀to฀wholesale฀funding.฀This฀has฀been฀achieved฀by฀actively฀ engaging฀and฀growing฀a฀diversiied฀global฀base฀of฀high฀quality฀investors.฀Issuance฀of฀medium฀term฀notes,฀commercial฀papers,฀negotiable฀ certiicate฀of฀deposits฀and฀other฀debt฀securities฀as฀a฀secondary฀source฀of฀funding,฀enables฀greater฀lexibility฀and฀eficiency฀in฀liquidity฀ management.฀2014฀saw฀growth฀in฀wholesale฀funding฀and฀a฀rebalancing฀of฀the฀wholesale฀funding฀mix฀from฀shorter-term฀commercial฀ papers฀to฀medium฀term฀notes. The฀diagrams฀below฀show฀our฀asset฀funding฀structure฀as฀at฀31฀December฀2014.฀ G O VER N A N C E POLICIES RISK METHODOLOGIES PROCESSES, SYSTEMS AND REPORTS Approach to Liquidity Risk Management DBS’ framework for liquidity risk management comprises the following building blocks: POLICIES The฀Liquidity฀Risk฀Framework฀sets฀out฀our฀overall฀approach฀towards฀ liquidity฀risk฀management.฀The฀Framework฀describes฀the฀range฀of฀ strategies฀employed฀by฀DBS฀to฀manage฀its฀liquidity.฀These฀include฀ maintaining฀an฀adequate฀counterbalancing฀capacity฀comprising฀ liquid฀assets,฀the฀capacity฀to฀borrow฀from฀the฀money฀markets฀as฀ well฀as฀forms฀of฀managerial฀interventions฀that฀improve฀liquidity฀to฀ address฀potential฀cashlow฀shortfalls฀and฀maintaining฀diversiied฀ sources฀of฀liquidity.฀In฀the฀event฀of฀a฀potential฀or฀actual฀crisis,฀DBS฀ has฀in฀place฀a฀set฀of฀liquidity฀contingency฀and฀recovery฀plans฀to฀ ensure฀that฀decisive฀actions฀are฀taken฀to฀ensure฀DBS฀maintains฀ adequate฀liquidity. The฀Core฀Liquidity฀Risk฀Policy฀establishes฀baseline฀standards฀฀ for฀liquidity฀risk฀management฀within฀DBS.฀Policies฀and฀guidance฀ documents฀communicate฀the฀base฀standards฀and฀detailed฀ requirements฀throughout฀DBS฀and฀enhance฀our฀ability฀to฀manage฀ liquidity฀risk.฀ RISK METHODOLOGIES The฀primary฀measure฀used฀to฀manage฀liquidity฀within฀the฀tolerance฀ deined฀by฀the฀Board฀is฀the฀cashlow฀maturity฀mismatch฀analysis.฀The฀ analysis฀is฀performed฀on฀a฀regular฀basis฀under฀normal฀and฀adverse฀ scenarios,฀and฀assesses฀the฀adequacy฀of฀the฀counterbalancing฀ capacity฀to฀fund฀or฀mitigate฀any฀cashlow฀shortfalls฀that฀may฀occur฀ as฀forecasted฀in฀the฀cashlow฀movements฀across฀successive฀time฀ bands.฀To฀ensure฀that฀liquidity฀is฀managed฀in฀line฀with฀the฀Risk฀ Appetite,฀core฀parameters฀underpinning฀the฀performance฀of฀the฀ analysis,฀such฀as฀the฀types฀of฀scenarios,฀the฀survival฀period฀and฀the฀ minimum฀level฀of฀liquid฀assets,฀are฀pre-speciied฀for฀monitoring฀and฀ control฀on฀a฀group-wide฀basis.฀Any฀occurrences฀of฀forecasted฀ shortfalls฀that฀cannot฀be฀covered฀by฀the฀counterbalancing฀capacity฀ would฀be฀escalated฀to฀the฀relevant฀committees฀for฀deliberation฀฀ and฀actions.฀ Stress฀testing฀is฀performed฀mainly฀under฀the฀cashlow฀maturity฀ mismatch฀analysis,฀and฀covers฀adverse฀scenarios฀involving฀shocks฀฀ that฀are฀general฀market฀andor฀name-speciic฀in฀nature฀to฀assess฀ vulnerability฀when฀run-offs฀in฀liabilities฀increase,฀rollovers฀of฀assets฀ andor฀liquidity฀assets฀buffers฀reduce.฀In฀addition,฀ad-hoc฀stress฀tests฀ are฀performed฀as฀part฀of฀our฀recovery฀planning฀and฀ICAAP฀exercises. Liquidity฀risk฀control฀measures,฀such฀as฀liquidity-related฀ratios฀฀ and฀balance฀sheet฀analysis,฀are฀complementary฀tools฀to฀the฀ cashlow฀maturity฀mismatch฀analysis฀and฀are฀performed฀regularly฀฀ to฀obtain฀deeper฀insights฀and฀iner฀control฀over฀the฀liquidity฀฀ proile฀across฀locations. ฀ Please฀refer฀to฀Note฀30฀to฀the฀Financial฀Statements฀on฀page฀152฀฀ for฀more฀details฀of฀our฀wholesale฀funding฀sources฀and฀Note฀42.1฀฀ on฀page฀175฀for฀the฀contractual฀maturity฀proile฀of฀our฀assets฀฀ and฀liabilities.฀ With฀increasing฀diversiication฀of฀funding฀sources,฀optimising฀the฀ mismatch฀in฀fund฀deployment฀against฀sources฀with฀respect฀to฀ pricing,฀size,฀currency฀and฀tenor฀remains฀challenging.฀To฀this฀฀ end,฀where฀practicable฀and฀transferable฀without฀loss฀in฀value,฀฀ DBS฀actively฀makes฀use฀of฀the฀swap฀markets฀in฀the฀conversion฀฀ of฀funds฀across฀currencies฀to฀deploy฀surplus฀funds฀across฀locations.฀ As฀the฀swaps฀are฀typically฀shorter฀in฀contractual฀maturity฀than฀฀ the฀deployment฀in฀loans,฀we฀are฀exposed฀to฀potential฀cashlow฀ mismatches฀arising฀from฀the฀risk฀that฀counterparties฀may฀not฀฀ roll฀over฀maturing฀swaps฀with฀us฀to฀support฀the฀continual฀funding฀ of฀loans.฀This฀risk฀is฀mitigated฀by฀the฀setting฀of฀triggers฀on฀the฀ amount฀of฀swaps฀transacted฀with฀the฀market฀and฀conservative฀ assumptions฀on฀the฀cashlow฀treatment฀of฀swaps฀under฀the฀ behavioural฀proiling฀of฀DBS’฀cashlow฀maturity฀gap฀analysis฀฀ see฀Section฀7.2฀on฀page฀110. Overseas฀entities฀are฀encouraged฀but฀not฀required฀to฀centralise฀ majority฀of฀their฀borrowing฀and฀deployment฀of฀funds฀with฀Head฀ Ofice,฀taking฀into฀account฀the฀relevant฀regulatory฀restrictions฀while฀ maintaining฀a฀commensurate฀level฀of฀presence฀and฀participation฀in฀ the฀local฀funding฀markets.฀These฀intra-group฀funding฀transactions฀ are฀priced฀on฀an฀arm’s฀length฀basis฀with฀reference฀to฀prevailing฀ market฀rates฀and฀parameters฀set฀within฀the฀Group฀Funds฀Transfer฀ Pricing฀policy.฀ During฀DBS’฀annual฀budget฀and฀planning฀process,฀each฀overseas฀ location฀conducts฀an฀in-depth฀review฀on฀their฀projected฀loan฀and฀ deposit฀growth฀as฀well฀as฀their฀net฀funding฀and฀liquidity฀proile฀for฀ the฀next฀year.฀The฀consolidated฀Group฀funding฀and฀liquidity฀proiles฀ are฀reviewed฀and฀revised฀as฀necessary฀by฀senior฀management.฀Each฀ overseas฀location฀is฀required฀to฀provide฀justiication฀if฀Head฀Ofice฀ funding฀support฀is฀required.฀ The฀Group฀Assets฀and฀Liabilities฀Committee฀and฀respective฀Location฀ Assets฀and฀Liabilities฀Committee฀regularly฀review฀balance฀sheet฀ composition,฀growth฀in฀loans฀and฀deposits,฀utilisation฀of฀wholesale฀ funding,฀momentum฀in฀business฀activities,฀market฀competition,฀ economic฀outlook,฀market฀conditions฀and฀other฀factors฀that฀may฀ affect฀liquidity฀in฀the฀continual฀reinement฀of฀DBS’฀funding฀strategy. PROCESSES, SYSTEMS AND REPORTS Robust฀internal฀control฀processes฀and฀systems฀underlie฀the฀overall฀approach฀to฀identifying,฀measuring,฀aggregating,฀controlling฀and฀ monitoring฀liquidity฀risk฀across฀DBS.฀In฀2014,฀we฀completed฀the฀development฀of฀an฀in-house฀integrated฀data฀platform฀that฀serves฀฀ to฀aggregate฀relevant฀source฀data฀in฀a฀complete฀and฀accurate฀manner฀that฀facilitates฀timely฀and฀granular฀reporting฀of฀liquidity฀risk฀for฀ internal฀and฀regulatory฀purposes. The฀day-to-day฀liquidity฀risk฀monitoring,฀control฀reporting฀and฀analysis฀are฀managed฀by฀the฀RMG฀Market฀and฀Liquidity฀Risk฀unit฀–฀an฀ independent฀liquidity฀risk฀management฀function฀that฀reports฀to฀the฀CRO.฀This฀group฀comprises฀risk฀control,฀risk฀analytics,฀production฀฀ and฀reporting฀teams.

7.2 Liquidity Risk in 2014