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## Risk Management Report continued 

Downturn forward earnings capacity is estimated by the Operating Groups and divisions with reference to a three year downturn scenario provided to them by RMG. 

Aggregate risk can be therefore broken down into two categories: 

GLYPH<150> business risk  – meaning decline in earnings through deterioration in volumes and margins due to market conditions 

GLYPH<150> potential losses  – including potential credit losses, write-downs of equity investments, operational risk losses and losses on trading positions. 

Business risk is captured by the difference in base case and downturn forward earnings estimates. Potential losses are quantified using a version of the economic capital model. 

A principal use of the Risk Appetite Test is in setting the Equity Risk Limit (ERL). This limit constrains Macquarie’s aggregate level of risk arising from principal equity positions, managed fund holdings, property equity investments, lease residuals and other equity investments. Any changes to the ERL are sized to ensure that even under full utilisation of this limit, and allowing for growth in other risk types, the requirements of the Risk Appetite Test will be met. 

## Liquidity risk 

## Liquidity management 

The two primary external funding vehicles for Macquarie are MGL and MBL. MGL provides funding principally to the Non-Banking Group and limited funding to some MBL Group subsidiaries. MBL provides funding to the Banking Group. 

The high level funding structure within Macquarie is shown below. 

Macquarie’s liquidity risk management framework is designed to ensure that both MGL and MBL are able to 

## Macquarie Group – high level funding structure 

meet their funding requirements as they fall due under a range of market conditions. 

Liquidity management is performed centrally by Group Treasury, with oversight from the Asset and Liability Committee and RMG. MGL and MBL liquidity policies are approved by the respective Boards after endorsement by the Asset and Liability Committee and liquidity reporting is provided to the MGL and MBL Boards on a monthly basis. 

The Asset and Liability Committee includes the CEO, MBL CEO, CFO, CRO and Business Group Heads. 

RMG provides independent prudential oversight of liquidity risk management, including the validation of liquidity scenario assumptions, liquidity policies, and the required funding maturity profile. 

## Liquidity policy and principles 

MGL provides funding predominantly to the Non-Banking Group. As such, the MGL LiquidityPolicyoutlines the liquidity requirements for the Non-Banking Group. MGL's risk appetite is set so that MGL is able to meet all of its liquidity obligations during a period of liquidity stress: a 12 month period with no access to funding markets and with only a limited impact on franchise businesses. 

Reflecting the longer term nature of the Non-Banking Group asset profile, MGL is funded predominantly with a mixture of capital and long-term wholesale funding. 

The MBL LiquidityPolicyoutlines the liquidity requirements for the Banking Group. MBL's risk appetite is set so that MBL is able to meet all of its liquidity obligations during a period of liquidity stress: a 12 month period of constrained access to funding markets and with only a limited impact on franchise businesses. 

MBL is funded mainly by capital, long-term liabilities and deposits. 

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