The two documents are:
· IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)
· IFSB-13: Guiding Principles on Stress Testing for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes).
The 20th Meeting of the IFSB Council was chaired by H.E. Rasheed M. Al-Maraj, Governor of the Central Bank of Bahrain and attended by the President of the Islamic Development Bank, and 17 governors and governors’ representatives from among the members of the Council. The Central Bank of Bahrain is hosting the 2012 IFSB Annual Meetings.
IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)
The IFSB-12 delineates a set of guiding principles for the robust management of liquidity risk by institutions offering Islamic financial services (IIFS) and their vigorous supervision and monitoring by supervisory authorities, taking into consideration the specificities of the IIFS, while complementing relevant international standards and best practices. In line with the objectives of the IFSB to support development of a prudent, efficient and resilient Islamic financial services industry, this document outlines 23 Guiding Principles comprising one general principle, 14 Guiding Principles for the IIFS and 8 Guiding Principles for supervisory authorities. These principles aim to provide guidance on effective management and supervision of liquidity risk.
The Guiding Principles for IIFS specify the structure of liquidity risk management process and provide necessary guidance on the identification, measurement, monitoring, control, reporting and mitigation of liquidity risk. The Guiding Principles for supervisory authorities outline important elements of the supervisory framework to monitor the liquidity positions and liquidity risk management framework of IIFS that include, inter alia, initiatives for the development of a robust national liquidity infrastructure, supervisors’ contingency planning for IIFS and supervisors’ role as provider of Shari`ah-compliant liquidity support to IIFS.
IFSB-13: Guiding Principles on Stress Testing for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)
IFSB-13 provides a comprehensive stress testing framework for both IIFS and supervisory authorities. The 29 Guiding Principles in IFSB-13 aim to provide a set of guidance intended to complement the existing international stress testing framework taking into consideration the specificities of IIFS as well as the lessons learned from the financial crisis so as to contribute to the soundness and stability of the IIFS, in particular, as well as the Islamic financial services industry as a whole.
The 22 Guiding Principles which provide a framework for IIFS are aimed to guide these institutions in assessing and capturing vulnerabilities under various stress-testing scenarios including extreme but plausible shocks, in order to achieve the following, inter alia, to identify how many different portfolios respond to changes in key economic variables, to evaluate potential threats to the IIFS’s ability to meet its financial obligations at any time arising from either funding or market liquidity exposures and to analyse the IIFS’s ability to meet its capital requirements at all times throughout a reasonably severe economic recession.
The seven Guiding Principles for supervisory authorities can be used as a surveillance tool for periodically testing the safety and soundness of the financial system (including IFSI), from a financial stability perspective, and to identify “weaknesses” in the financial system and structural (systemic) vulnerabilities arising from the specific risk profiles of IIFS individually and collectively. They are also beneficial as a supervisory tool for designing macro-prudential policies.
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