Liquidity and Funding Risk

Introduction

Liquidity is the capacity of a bank to meet its payment and settlement obligations when they fall due, without incurring unacceptable losses. Funding risk is the risk that a bank cannot obtain, renew, or replace funding on acceptable terms. Although closely related, the concepts are not identical. A bank may hold assets that are valuable in economic terms but difficult to sell quickly; conversely, it may have substantial cash but be exposed to excessive reliance on unstable wholesale funding.

Liquidity risk is central to banking because banks transform maturities: they fund relatively long-term, illiquid loans with deposits and other liabilities that may be withdrawn or mature earlier. This transformation supports economic activity but creates vulnerability to withdrawals, market disruptions, collateral calls, payment-system failures, and loss of confidence. The failure of a bank can therefore arise from a liquidity crisis even when its balance sheet remains solvent.

Effective liquidity management integrates cash-flow forecasting, asset-liability management, funding diversification, liquidity buffers, stress testing, intraday monitoring, regulatory ratios, and a credible contingency funding plan (CFP).

Learning Objectives

By the end of this chapter, the reader should be able to:

• distinguish liquidity, funding, market-liquidity, and solvency risk;
• construct and interpret contractual and behavioural liquidity gaps;
• assess funding concentration and survival horizons;
• evaluate market and intraday liquidity risk;
• design liquidity stress tests and contingency funding plans;
• calculate and interpret the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR);
• make managerial decisions concerning buffers, funding structure, pricing, and risk appetite.

1. The Nature of Liquidity and Funding Risk

1.1 Liquidity risk and its dimensions

Liquidity risk has two principal dimensions:

1. Funding liquidity risk: the inability to obtain cash or renew liabilities when required.
2. Market liquidity risk: the inability to sell or hedge an asset quickly without materially affecting its price.

These dimensions interact. If a bank must sell a large portfolio during market stress, market prices may fall. The resulting losses can reduce capital and confidence, causing further withdrawals and funding difficulties. This feedback mechanism is often called a liquidity spiral.

Solvency risk concerns whether the economic value of assets is sufficient to cover liabilities. Liquidity risk concerns timing and convertibility. A solvent bank may fail if it cannot meet obligations today; an insolvent bank may temporarily remain liquid if it has access to funding.

1.2 Sources of liquidity risk

Important sources include:

• retail deposit withdrawals and deposit migration;
• non-renewal of wholesale funding;
• collateral calls under derivatives or repurchase agreements;
• loan commitments and credit lines being drawn;
• margin requirements and settlement obligations;
• concentrations by depositor, instrument, currency, maturity, or market;
• reputational events and credit-rating downgrades;
• operational, cyber, or payment-system disruptions;
• foreign-exchange convertibility and transfer restrictions.

Liquidity risk is also generated by contingent liabilities. An undrawn corporate credit facility is not a current cash outflow, but it may become one during a crisis, precisely when replacement funding is most difficult.

2. Cash-Flow Analysis and Liquidity Gaps

2.1 Contractual cash-flow ladder

A liquidity ladder places expected cash inflows and outflows into time buckets such as overnight, 2–7 days, 8–30 days, 31–90 days, and beyond one year. The basic net cash flow for bucket t is:

where I_t is cash inflows and O_t is cash outflows in bucket t, both measured in the same currency and time interval. A cumulative liquidity gap is:

A negative cumulative gap indicates that projected funding needs exceed identified inflows up to that date. The calculation assumes that cash-flow estimates are appropriately classified and that inflows can actually be realised when required.

2.2 Worked example: contractual gap

Suppose a bank reports the following simplified cash flows in millions of currency units:

The first bucket creates a funding need of 45 million. Although later inflows produce a positive cumulative position, they do not automatically solve the immediate problem because the bank must survive the first seven days. Management could address the gap through cash, central-bank eligible collateral, asset sales, secured borrowing, or additional stable funding.

2.3 Contractual versus behavioural cash flows

Contractual ladders use legal maturity dates. Behavioural analysis adjusts them for economically realistic assumptions. Examples include:

• a portion of current-account deposits may remain stable despite having no contractual maturity;
• term deposits may be withdrawn early or renewed;
• loan repayments may be delayed or prepaid;
• mortgage prepayments may change with interest rates;
• committed facilities may be drawn during stress;
• collateral values and haircuts may change.

Behavioural models must be evidence-based, documented, validated, and periodically back-tested. A model that treats all deposits as permanently stable can understate risk; a model that assumes every deposit leaves immediately may be too conservative for ordinary planning but useful for severe stress testing.

3. Funding Structure and Concentration Risk

A resilient funding profile is diversified across sources, maturities, counterparties, instruments, currencies, and markets. Common funding sources are retail deposits, corporate deposits, interbank borrowing, certificates of deposit, commercial paper, bonds, repo, securitisation, and central-bank facilities.

3.1 Concentration indicators

A simple funding concentration ratio is:

The source may be defined as a depositor, counterparty, instrument, market, or maturity band. For a broader measure, the Herfindahl–Hirschman Index can be used:

where s_i is the proportion of total funding supplied by source i, expressed as a decimal. The HHI rises as funding becomes concentrated. Its interpretation depends on the chosen population and threshold; it should not be treated as a universal regulatory limit.

Concentration may be hidden by legal entities or products. For example, deposits from many subsidiaries of one corporate group may represent a single economic counterparty. Similarly, several brokers may ultimately channel funds from the same investor base.

3.2 Funding maturity and rollover risk

Rollover risk occurs when liabilities mature and must be replaced. It increases when a large share of funding matures in a short period, particularly when asset cash flows are delayed. A bank should examine maturity walls, refinancing assumptions, callable liabilities, embedded options, and the availability of unencumbered collateral.

Pricing decisions should reflect liquidity value. A loan that consumes scarce stable funding or creates substantial contingent drawdown risk should not be priced solely on credit risk and operating cost. Internal funds-transfer pricing can allocate liquidity costs and benefits to business lines.

4. Liquidity Buffers and Survival Horizons

A liquidity buffer consists of assets that can be converted into cash rapidly with limited loss. It commonly includes cash, central-bank reserves, high-quality government securities, and other assets eligible for secured funding. The relevant measure is not merely accounting value but stressed monetisable value:

The haircut reflects price volatility, market depth, collateral eligibility, and liquidation costs. An asset worth 100 million with a 10% haircut provides 90 million of stressed funding value, before considering operational or legal restrictions.

A survival horizon is the time until available liquidity is exhausted under a specified scenario. A simplified expression is:

This is a scenario-dependent management metric, not a fixed property of the bank. It depends on assumptions about deposit runoff, collateral haircuts, asset monetisation, central-bank access, and management actions.

Buffers must be usable. Operational pre-positioning, legal documentation, settlement access, currency compatibility, and absence of encumbrance are essential. A security that is theoretically liquid but held in a restricted entity may not protect the group during a crisis.

5. Market Liquidity and Intraday Liquidity

5.1 Market liquidity

Market liquidity is commonly assessed through:

• bid–ask spreads;
• trading volume and turnover;
• market depth;
• price impact of transactions;
• time required to liquidate a position;
• dependence on a small number of dealers;
• correlation of liquidity across assets during stress.

Historical liquidity measures can be misleading because market depth often disappears during crises. Stress assumptions should therefore include wider spreads, larger price impacts, longer liquidation periods, and higher collateral haircuts.

A bank should distinguish liquid assets from liquid securities. A security may trade frequently in normal conditions but become difficult to sell when many institutions attempt to liquidate similar positions.

5.2 Intraday liquidity

Intraday liquidity is the ability to meet payment and settlement obligations throughout the business day. It differs from end-of-day liquidity because a bank may finish the day with sufficient cash while failing earlier payment obligations.

Key exposures include:

• outgoing customer and correspondent payments;
• securities settlement;
• foreign-exchange settlement;
• central-counterparty margin calls;
• payment-system queues and deadlines;
• collateral substitutions and releases;
• time-zone mismatches.

Banks should identify critical payment obligations, forecast intraday peaks, monitor available collateral, establish payment priorities, and maintain escalation procedures. A liquidity dashboard that reports only daily balances cannot adequately manage intraday risk.

6. Liquidity Stress Testing

Stress testing evaluates whether a bank can withstand adverse but plausible conditions. It should combine quantitative projections with management judgement and reverse-stress analysis.

6.1 Stress scenarios

Typical scenarios include:

1. Idiosyncratic stress: rumours, rating downgrade, fraud, cyber incident, or loss of market confidence affecting one bank.
2. Market-wide stress: frozen wholesale markets, falling asset prices, wider spreads, and reduced repo capacity.
3. Combined stress: simultaneous bank-specific and systemic disruption.
4. Operational stress: payment outage, cyberattack, data failure, or loss of a critical service provider.
5. Currency stress: inability to transfer liquidity across jurisdictions or convert one currency into another.

Stress parameters may include deposit runoff rates, wholesale rollover failure, committed-facility drawdowns, collateral haircuts, derivative margin calls, asset-sale discounts, and central-bank availability.

6.2 Scenario construction

A useful stress test follows these steps:

1. establish the baseline cash-flow ladder;
2. identify vulnerable assumptions and critical dependencies;
3. apply scenario-specific inflow and outflow shocks;
4. revalue collateral and apply stressed haircuts;
5. incorporate legal-entity, currency, and transfer constraints;
6. model realistic management actions and their execution time;
7. calculate cumulative gaps, buffer depletion, and survival horizon;
8. compare results with risk appetite and escalation limits.

Stress tests should avoid double counting. For example, a deposit runoff assumption and a wholesale funding closure may represent related confidence effects; the scenario must explain why both are applied and whether their joint occurrence is plausible.

6.3 Reverse stress testing

Reverse stress testing begins with failure—for example, exhaustion of the liquidity buffer within five business days—and asks which combination of assumptions would produce that outcome. It reveals hidden concentrations and helps identify early-warning indicators. It is especially valuable where probability estimates are unreliable.

7. Contingency Funding Plans

A CFP specifies how the bank will respond when liquidity conditions deteriorate. It should be approved by senior management and integrated with the recovery plan, resolution plan, communication policy, and risk appetite framework.

A credible CFP contains:

• governance and decision rights;
• early-warning indicators and trigger levels;
• crisis classifications and escalation procedures;
• a current inventory of liquid assets and collateral;
• available secured and unsecured funding lines;
• central-bank and correspondent-bank procedures;
• asset-sale and repo strategies;
• deposit-retention and customer-communication actions;
• legal-entity and currency constraints;
• operational contact lists and testing schedules.

Possible early-warning indicators include rapid deposit outflows, increasing funding spreads, falling share price, rating deterioration, collateral calls, reduced market depth, payment delays, and unusual use of committed lines.

Management actions should be ranked by speed, reliability, cost, and reputational effect. A plan that assumes simultaneous sale of illiquid assets, new unsecured borrowing, and customer retention without operational preparation is not a credible plan.

8. Regulatory Liquidity Standards

Regulatory frameworks provide minimum standards; they do not replace internal liquidity risk management. The exact implementation depends on the applicable jurisdiction and supervisory rules.

8.1 Liquidity Coverage Ratio

The LCR is designed to promote sufficient high-quality liquid assets (HQLA) to survive a specified short-term stress period, commonly 30 calendar days under the Basel framework.

Net cash outflows generally equal stressed outflows minus stressed inflows, subject to regulatory caps and eligibility rules. HQLA are subject to classification, valuation, operational, and haircut requirements. A ratio of 100% means that the eligible buffer equals the calculated net outflows; it does not mean that all liquidity risks have disappeared.

Illustrative calculation: If eligible HQLA are 240 million and regulatory net cash outflows are 200 million:

The bank exceeds a 100% minimum in this simplified illustration. However, management must still examine intraday needs, longer-term funding, currency mismatches, and the possibility that the buffer cannot be monetised in a particular jurisdiction.

8.2 Net Stable Funding Ratio

The NSFR addresses structural funding over a longer horizon, generally one year. It compares available stable funding with required stable funding:

Available stable funding (ASF) reflects the stability of liabilities and capital. Required stable funding (RSF) reflects the liquidity characteristics and residual maturities of assets and off-balance-sheet exposures. More illiquid or longer-term assets generally require more stable funding.

For example, if ASF is 900 million and RSF is 800 million:

The NSFR can discourage excessive reliance on short-term wholesale funding to finance illiquid assets. It is not a substitute for a detailed maturity ladder because ratio aggregation can conceal timing concentrations.

8.3 Interpreting ratios critically

LCR and NSFR are standardized indicators. They may not capture:

• rapid intraday payment peaks;
• institution-specific franchise damage;
• legal restrictions on transferring liquidity;
• simultaneous stress in several currencies;
• market liquidity collapse in assets treated as eligible;
• operational inability to access collateral;
• correlated withdrawals across supposedly separate depositors.

Managers should therefore use regulatory ratios alongside cash-flow projections, concentration limits, stress tests, early-warning indicators, and qualitative judgement.

9. Governance, Data, Technology, and Ethics

The board is responsible for setting liquidity risk appetite, approving the funding strategy, and ensuring that the bank can identify, measure, monitor, and control liquidity risk. Senior management implements limits, allocates liquidity costs, and ensures timely escalation. The treasury function manages funding and buffers, while an independent risk function challenges assumptions and reports exposures.

Strong data governance is essential. Liquidity systems should reconcile positions across the general ledger, treasury, collateral management, payments, derivatives, and regulatory reporting systems. Data should be sufficiently granular to identify currency, entity, counterparty, maturity, encumbrance, and product features.

Artificial intelligence and advanced analytics can improve deposit-flow forecasting, anomaly detection, and intraday payment prediction. However, model risk is material. A machine-learning model trained on calm-period data may fail during a regime change. Models should therefore be explainable enough for governance, tested under stress, monitored for drift, and supplemented by expert judgement.

Ethically, banks should communicate honestly during stress and avoid misleading customers about deposit safety or access to funds. Liquidity preservation must not be achieved through unfair discrimination among customers or through concealment of material weaknesses. Regulatory reporting must be accurate, timely, and free from window dressing, such as temporarily altering balance-sheet composition merely to improve a reporting-date ratio.

10. Illustrative Case: Meridian Commercial Bank

Background

Meridian Commercial Bank is a fictional mid-sized bank that finances commercial real estate and small businesses. It has grown rapidly through brokered deposits and short-term certificates of deposit. Its LCR is 108%, NSFR is 103%, and 38% of its wholesale funding matures within 30 days. A large share of its HQLA is held at the parent company in another jurisdiction.

Problem

A negative social-media report questions the quality of Meridian’s commercial property loans. Within three days, uninsured corporate deposits fall by 12%. Two wholesale counterparties decline to roll over funding, a derivative margin call is received, and the market value of some securities declines. The bank’s daily liquidity ratio remains above its internal minimum, but its intraday payment peak increases sharply.

Analysis

The contractual ladder shows a 60 million shortfall in the first seven days. The bank’s reported HQLA total 250 million, but 70 million is encumbered and 45 million is operationally unavailable in the affected subsidiary. Applying a 10% haircut to the remaining 135 million gives stressed monetisable value of 121.5 million. The bank also estimates 35 million of additional deposit outflows and 20 million of facility drawdowns under the combined stress scenario.

The central issue is not simply whether Meridian’s headline LCR exceeds 100%. Its vulnerability arises from funding concentration, entity-level restrictions, a maturity wall, collateral calls, and weak intraday planning.

Approach and solution

The treasury committee activates the CFP. It immediately:

• prioritises critical payments and increases intraday monitoring;
• mobilises pre-positioned eligible collateral;
• uses secured funding rather than attempting distressed unsecured borrowing;
• pauses non-essential asset growth and discretionary distributions;
• contacts major depositors through a coordinated communication plan;
• transfers permitted liquidity to the stressed subsidiary;
• reassesses deposit runoff, collateral haircuts, and counterparty limits daily.

The bank also initiates a structural review: it reduces reliance on short-term brokered deposits, establishes entity-level buffer requirements, limits maturity concentrations, and incorporates social-media and reputation indicators into early-warning monitoring.

Outcome

Meridian meets its payment obligations and avoids forced sales. Nevertheless, management concludes that the original liquidity framework was too ratio-focused. The bank raises its internal survival-horizon requirement, increases unencumbered HQLA, improves intraday forecasting, and links business-line growth to stable-funding consumption.

Learning points

The case demonstrates that liquidity resilience depends on availability, location, timing, and usability of resources. A compliant LCR does not guarantee resilience when buffers are encumbered, trapped, or difficult to mobilise. Funding diversification and operational readiness are as important as numerical ratios.

11. Managerial Decision Framework and Best Practices

Managers should make liquidity decisions through an integrated sequence:

1. Identify contractual, behavioural, contingent, market, currency, and intraday exposures.
2. Measure gaps, concentrations, buffer usability, survival horizons, LCR, and NSFR.
3. Stress the bank under idiosyncratic, systemic, combined, operational, and reverse-stress scenarios.
4. Decide on funding mix, buffer size, asset growth, pricing, limits, and contingency actions.
5. Monitor indicators at appropriate frequencies, including real-time monitoring for critical payments.
6. Learn through back-testing, post-incident reviews, limit-breach analysis, and independent validation.

Best practices include maintaining diversified funding; setting limits by counterparty, product, currency, entity, and maturity; holding unencumbered and operationally accessible buffers; pre-positioning collateral; modelling behavioural assumptions conservatively; conducting regular CFP exercises; and ensuring board-level understanding of liquidity dependencies.

Challenges and Limitations

Liquidity measurement involves uncertainty. Behavioural assumptions can change rapidly, market prices may become discontinuous, and historical withdrawal patterns may not predict a digital bank run. Ratios can encourage compliance behaviour without genuine resilience. Group-wide resources may not be transferable, and stress scenarios may omit unknown unknowns. Finally, defensive actions such as raising liquidity quickly may increase funding costs, reduce profitability, or signal distress. Sound governance must balance resilience, efficiency, and transparency rather than pursue a single ratio target.

Chapter Summary

Liquidity risk is the risk that a bank cannot meet obligations when due, while funding risk focuses on obtaining or renewing funding. Effective management distinguishes funding liquidity from market liquidity, and both from solvency risk. Cash-flow ladders reveal contractual and behavioural mismatches; cumulative gaps and survival horizons show when resources may be exhausted. Funding concentration, maturity walls, collateral calls, and contingent commitments are major vulnerabilities.

Liquidity buffers must be high quality, unencumbered, legally accessible, and operationally monetisable. Market liquidity and intraday liquidity require monitoring beyond end-of-day balance-sheet measures. Stress testing should include bank-specific, market-wide, combined, operational, currency, and reverse-stress scenarios. A contingency funding plan converts warning indicators into authority, actions, communication, and execution procedures.

The LCR measures short-term stressed liquidity coverage, while the NSFR addresses structural funding stability. Both are useful but incomplete. Managerial judgement, data quality, governance, technology controls, ethical conduct, and continuous testing are necessary for genuine resilience.

Key Terms

Liquidity risk: Risk of failing to meet obligations when due.

Funding liquidity risk: Risk of being unable to obtain or renew cash funding.

Market liquidity risk: Risk of being unable to sell or hedge assets without significant price impact.

Solvency risk: Risk that asset value is insufficient to cover liabilities.

Liquidity gap: Difference between cash inflows and outflows over a time bucket.

Cumulative liquidity gap: Sum of net cash-flow gaps up to a specified time.

Behavioural cash flow: Cash flow estimated from observed economic behaviour rather than legal maturity.

Funding concentration: Dependence on a limited source, counterparty, instrument, market, or maturity.

Rollover risk: Risk that maturing funding cannot be replaced.

Liquidity buffer: Assets available to meet stressed cash needs.

Haircut: Reduction applied to an asset’s value for collateral or liquidation purposes.

Survival horizon: Time until available liquidity is exhausted under a scenario.

Intraday liquidity: Capacity to meet payment obligations during the business day.

High-quality liquid assets (HQLA): Eligible assets that can be monetised rapidly with limited loss.

LCR: Short-term ratio of HQLA to stressed net cash outflows.

NSFR: Structural ratio of available stable funding to required stable funding.

Contingency funding plan: Predefined framework for responding to liquidity stress.

Available stable funding: Funding expected to remain reliable over the relevant horizon.

Required stable funding: Stable funding needed for assets and exposures based on their liquidity characteristics.

Window dressing: Temporary balance-sheet actions designed to improve reported metrics without improving underlying resilience.

Review Questions

Short Answer Questions

1. Distinguish funding liquidity risk from market liquidity risk.
2. Why can a solvent bank nevertheless fail because of liquidity risk?
3. What is the purpose of a behavioural cash-flow model?
4. Identify four important components of a contingency funding plan.
5. Why are LCR and NSFR insufficient as stand-alone liquidity measures?

Long Answer Questions

1. Explain how maturity transformation creates liquidity risk and discuss the principal controls available to a bank.
2. Describe how a bank should construct and interpret a contractual and behavioural liquidity ladder.
3. Analyse the relationship between funding concentration, rollover risk, and liquidity stress.
4. Explain the design of liquidity stress tests, including scenario selection, management actions, and reverse stress testing.
5. Compare the LCR and NSFR in terms of purpose, construction, usefulness, and limitations.

Analytical / Application Questions

1. A bank has inflows of 75 million and outflows of 120 million in the first week, followed by inflows of 100 million and outflows of 60 million in the next three weeks. Calculate the net and cumulative gaps for both periods and explain the managerial significance.
2. A bank holds 300 million of potentially liquid securities. Of this amount, 80 million is encumbered, and a 15% haircut applies to the remainder. Calculate the stressed monetisable value and discuss two operational conditions required before the value can be included in a liquidity buffer.
3. A bank reports HQLA of 360 million and regulatory net cash outflows of 300 million. Calculate its LCR. Then explain why a manager should still investigate currency, entity, intraday, and market-liquidity risks.

Multiple Choice Questions with Answers

Question 1

Which statement best distinguishes liquidity risk from solvency risk?

A. Liquidity risk concerns timing and access to cash, whereas solvency risk concerns the value of assets relative to liabilities.

B. Liquidity risk occurs only in retail banks, whereas solvency risk occurs only in investment banks.

C. Liquidity risk is measured only by capital ratios, whereas solvency risk is measured only by payment flows.

D. Liquidity risk and solvency risk are identical terms.

Correct Answer: A. Liquidity risk concerns timing and access to cash, whereas solvency risk concerns the value of assets relative to liabilities.

Question 2

A bank has cash inflows of 80 million and outflows of 125 million in a seven-day bucket. What is its net cash flow for that bucket?

A. 45 million inflow

B. 45 million outflow

C. 205 million inflow

D. 205 million outflow

Correct Answer: B. 45 million outflow

Question 3

What does a negative cumulative liquidity gap indicate?

A. Projected cash inflows exceed outflows up to the specified date.

B. The bank is necessarily insolvent.

C. Projected funding needs exceed identified inflows up to the specified date.

D. The bank has no market-liquidity risk.

Correct Answer: C. Projected funding needs exceed identified inflows up to the specified date.

Question 4

Which action most directly reduces funding concentration risk?

A. Increasing reliance on one large depositor

B. Diversifying funding across counterparties, instruments, maturities, and markets

C. Holding all funding in one short-term instrument

D. Reducing the number of funding providers to simplify reporting

Correct Answer: B. Diversifying funding across counterparties, instruments, maturities, and markets

Question 5

A security has a market value of 100 million and a 10% haircut. What is its stressed value before other restrictions?

A. 10 million

B. 90 million

C. 100 million

D. 110 million

Correct Answer: B. 90 million

Question 6

What is the principal purpose of a liquidity survival horizon?

A. To measure annual profitability

B. To identify how long liquidity lasts under a specified scenario

C. To calculate the bank’s credit rating

D. To determine the accounting maturity of equity

Correct Answer: B. To identify how long liquidity lasts under a specified scenario

Question 7

Which exposure is specifically associated with intraday liquidity risk?

A. A payment obligation due during the business day

B. A loan that matures in ten years with no payment today

C. An annual tax expense already paid

D. A historical accounting adjustment

Correct Answer: A. A payment obligation due during the business day

Question 8

The LCR primarily compares HQLA with which quantity?

A. Annual net interest income

B. Total regulatory capital

C. Stressed net cash outflows over the specified short-term period

D. Total loan-loss provisions

Correct Answer: C. Stressed net cash outflows over the specified short-term period

Question 9

A bank has HQLA of 240 million and net cash outflows of 200 million. What is its LCR?

A. 83%

B. 100%

C. 120%

D. 440%

Correct Answer: C. 120%

Question 10

Which feature makes a contingency funding plan credible?

A. It contains only a target ratio and no assigned responsibilities.

B. It relies exclusively on selling illiquid assets during a crisis.

C. It defines triggers, decision rights, available actions, and operational procedures.

D. It is activated only after all liquidity has been exhausted.

Correct Answer: C. It defines triggers, decision rights, available actions, and operational procedures.