Internal Liquidity Adequacy Assessment Process (ILAAP)

It is the liquidity counterpart to the capital assessment and is used mainly in Europe under supervisory review rules. The bank identifies its liquidity and funding risks, sets limits and measures them, runs stress scenarios, and tests whether its stock of liquid assets would last long enough. The document also covers funding plans, intraday liquidity, collateral, and a contingency funding plan setting out actions if a crisis hits, such as selling assets or drawing on central bank facilities. The board approves it and attests that the framework is sound. Supervisors use it with ratios such as the liquidity coverage ratio, but they look at the bank's own method as well as the headline numbers. Reviewers test whether the contingency actions are realistic, since a plan to sell assets into a falling market may not raise the cash it promises.

In its yearly ILAAP, a bank tests a scenario in which a rating downgrade makes depositors withdraw 15% of funds in two weeks. The result shows liquid assets would cover the outflow but the contingency plan relies on selling bonds into a falling market. The board orders a larger stock of central bank eligible assets and a clearer decision chain for the plan.