Mega Bank Annual Report 2017

89 Annual Report 2017 -89- (4) Liquidity risk A. Definition and sources of liquidity risk The Bank and subsidiaries define liquidity risk as the risk of financial loss to the Bank and subsidiaries arising from default by any companies of financial instruments on the payment obligations. For example, the companies are default on payment obligations, such as withdrawals paid to depositors and loans repayment. Or, the company is unable to obtain funds within a certain period at reasonable cost in response to increased demand for assets. B. Procedures for liquidity risk management and measurement of liquidity risk The Bank and subsidiaries are mainly engaged in industry related to finance. Therefore, the management for capital liquidity is very important to the Bank and subsidiaries. The objectives for liquidity risk management are (a) Meet the liquidity index regulation (b) Maintain reasonable liquidity based on business development plans, ensure capability of daily payment obligations and meet business growth requirements with adequate highly-liquid assets and capability of raising funds from others in case of emergency. The financial department of the Bank and subsidiaries is responsible for daily capital liquidity management. According to the limits authorized by the Board of (Managing) Directors, the Bank and subsidiaries monitor the indexes of liquidity risk, execute capital procurement trading and report the conditions of capital liquidity to the management. The Bank and subsidiaries also reports the liquidity risk control to the Fund Management Committee, Risk Management Committee and the Board of (Managing) Directors regularly, and performs regular liquidity stress-testing to ensure sufficient capital to meet the funding requirements for increase in assets and payment obligations. The Bank and subsidiaries daily perform intensive control over capital sources and the period for fund gaps and liquidity risk management. Future cash flows are estimated based on the financial liability contracts due date and expected cash collection date of financial assets. The Bank and subsidiaries also take into account the extent of practical utilization of capital in contingent liabilities such as use of loan limits, guarantees and commitments. Assets used to pay obligations and loan commitments including cash and cash equivalents, due from the Central Bank and call loans to other banks, financial assets at fair value through profit or loss, bills and bonds purchased under resale agreement, receivables, bills discounted and loans, available-for-sale financial assets, held-to-maturity financial assets, and other financial assets are held in response to unexpected cash outflows. The liquidity management policies of the Bank and subsidiaries include: (A) Maintain the ability to perform all payment obligations immediately. (B) Maintain solid assets/liabilities structure to ensure medium and long-term liquidity safety. (C) Diversify capital sources and absorb stable core depositors to avoid depending on certain large-sum depositors. (D) Avoid potential unknown loss risk which will increase capital cost and capital procurement pressure. (E) Conduct due date management to ensure that cash inflow is greater than cash outflow in short term. (F) Keep liquidity ratio. (G) Keep legal ratio for high-quality, high-liquidity assets. (H) Be aware of the liquidity, safety and diversity of financial instruments. (I) The Bank and subsidiaries have capital emergency plans, which are reviewed regularly. (J) The overseas branches of the Bank and subsidiaries must obey the regulations of R.O.C. and the local supervisory authorities. Otherwise, they will be penalized for violation of these regulations. C. Maturity date analysis for non-derivative financial assets and liabilities The table below lists analysis for cash inflow and outflow of the non-derivative financial assets and liabilities held by the Bank and subsidiaries for liquidity risk management based on the remaining period at the financial reporting date to the contractual maturity date. (Blank below)