Liquidity Risk Management. Thomas Schmale, Solution Management Analytical Banking, SAP AG, 29 th May 2014

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1 Liquidity Risk Management Thomas Schmale, Solution Management Analytical Banking, SAP AG, 29 th May 2014

Banks face an information availability problem?

4 A new paradigm to cope with new challenges Calculate Aggregate Visualize classical DB Transactional Source Data Analytical Results Info Cubes Analyze Transactional Processing Analytical Processing Data Warehousing in memory DB Transactional Data Calculate&Aggregate&Visualize&Analyze Real Time Transactional and Analytical Processing 2014 SAP AG. All rights reserved. 5

6 Liquidity Risk relevant regulatory requirements Issue/ Issuer BCBS (Basel Committee on Banking Supervision) BCBS 136 Liquidity Risk: Management and Supervisory Challenges BCBS 144 Principles for Sound Liquidity Risk Management and Supervision BCBS 155 Principles for sound stress testing practices and supervision BCBS 157 Enhancements to BCBS 238 Basel III: International the Basel II framework framework for liquidity risk BCBS 159 Guidelines for measurement, standards and computing capital for incremental monitoring risk in the trading book BCBS 239 Basel III: Principles for BCBS 193 Revisions to the effective risk data aggregation Basel II market risk framework and risk reporting BCBS 248 Basel III: Monitoring indicators for intraday liquidity management CEBS/ EBA (European Banking Authority) UK FSA (Financial Services Authority)/ Bank of England US Federal Reserve CEBS (CP 28) Guidelines on Liquidity Buffers CP 08/22 Strengthening liquidity Standards CP 08/24 Stress and scenario testing CEBS (CP 31) Guidelines on aspects of the management of concentration risk CEBS (CP 32) Guidelines on Stress Testing CEBS (CP36) Guidelines on Liquidity Cost Benefit Allocation CP 09/13 Strengthening liquidity BIPRU Chapter 12: standards 2: Liquidity reporting Liquidity standards CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures Dodd-Frank Wall Street Reform and Consumer Protection Act Three Notices of Proposed Rules intended to ensure strong capital positions Proposed Rule LCR (board meeting) Paper 2052a, 2052b 5G Reporting 2014 SAP AG. All rights reserved. 7

7 BCBS: Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools 238 Liquidity risk portion of the BCBS reforms to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. Minimum standards for funding liquidity through LCR and NSFR. Liquidity Risk LCR Ratio: NSFR Ratio: High Quality Liquid Assets Net Cash Outflow (30 D Horizon) Available Stable Funding (Sources) Required Stable Funding (Uses) Level 1: Cash, Sovereign and Central Bank Debt, Level 2(A, B): Sovereign and Central Bank Debt, AA- or higher rated bonds, Cash Outflows: Retail deposits, Unsecured Wholesale Funding, Repos, CCLs, Derivative Outflow Cash Inflows: Reverse Repos, Obtained Credit Lines, Other Inflows Regulatory Capital (Less) Stable Deposits, Wholesale Funding All other Liabilities Cash, Securities, Debt, Off-balance Sheet Exposures Bonds, Equities, Gold, Specific Loans All other Assets 2014 SAP AG. All rights reserved. 8

8 Cash Trapping in a multi-national bank 238 Manage HQLA in cross-border banking groups in terms of the possibilities to include them into the consolidated group level o BIS: BCBS 238: 36, 171, 172 o Fed: Proposed Rule LCR: 20 (e) (3), (4) plus 20 (f) Group Fungible Entities Non-fungible Entities USA Retail USA Capital Canada Universal UK Capital Germany Cayman Islands Italy 2014 SAP AG. All rights reserved. 9

9 Cash Trapping in a non-fungible entity 238 Level 2 Trapped Level 2 Untrapped Level 2 Level 2 Level 2 Split factor Level 2 Assets Level 1 Level 1 Trapped Level 1 Untrapped Level 1 Net Outflows Total HQLA Untrapped HQLA Trapped HQLA Split factor Level 1 Assets Capped Level 2 Assets Projected Net Outflows Projected Level 1 Assets Projected Level 2 Assets Net Outflows Level 1 Assets Level 2 Assets 2014 SAP AG. All rights reserved. 10

11 BCBS: Principles for sound stress testing practices and supervision 155 Stress testing is an important risk management tool that is used by banks as part of their internal risk management and is promoted by supervisors. Stress testing alerts bank management to adverse unexpected outcomes related to a variety of risks and provides an indication of how much capital might be needed to absorb losses should large shocks occur Stress testing is a tool that supplements other risk management approaches and measures. It plays a particularly important role in: o providing forward-looking assessments of risk; o overcoming limitations of models and historical data; o supporting internal and external communication; o feeding into capital and liquidity planning procedures; o informing the setting of a banks risk tolerance; and o facilitating the development of risk mitigation or contingency plans across a range of stressed conditions SAP AG. All rights reserved. 12

12 Stress testing in terms of Liquidity Risk 155 Risk Factors: Interest Rates FX ASF and RSF Factors Haircuts Behavioral assumptions (runoff, drawdown, ) Forecasting and planning assumptions (rollover, new business, ) Risk Drivers (ILAA): Wholesale funding risk Retail funding liquidity risk Intra-day liquidity risk Intra-group liquidity risk Cross-currency liquidity risk Off-balance sheet risk Franchise viability risk Marketable assets risk Non-marketable assets risk Funding concentration risk Analytics: Forward Liquidity Exposure Counterbalancing Capacity LCR, NSFR Sensitivities Stress testing Monitoring: Early Warnings Contingency Funding Plans Limits 2014 SAP AG. All rights reserved. 13

13 BCBS: Principles for effective risk data aggregation and risk reporting 239 Significant lessons learned from the financial crisis were that o banks data architectures were inadequate to support management of financial risks. o banks lacked the ability to aggregate risk exposures and identify concentrations quickly and accurately at various relevant levels. Risk data aggregation means managing risk data to enable the bank to measure its performance against it risk tolerance/ appetite. Objective is to enhance risk management and decision-making processes Principles have been defined, especially: o Risk data aggregation capabilities: o Accuracy and Integrity o Completeness o Timeliness o Adaptability o Risk reporting practices 2014 SAP AG. All rights reserved. 14

Interactive aggregation and stress testing of

analytic UI Mobile BI Non-SAP Monitoring Key

scenario(s)/portfolio/filter Calculation

Haircuts, FX rates Behavioral data on flexibly

Analytical views on transactional cash flow

14 Interactive aggregation and stress testing of cash flows profiles 239 Visualization Native analytic UI Mobile BI Non-SAP Monitoring Key date(s)/maturity Band/ scenario(s)/portfolio/filter Calculation hierarchy % Scenario run off max roll over t min h(x,y) f(x,y) g(x,y) What if? Market Data, e.g. Haircuts, FX rates Behavioral data on flexibly defined portfolios In memory DB Generated SQL Analytical views on transactional cash flow object Select from special artifacts SQL script or extra joins for special logic, such as simulation 2014 SAP AG. All rights reserved. 15

16 BCBS: Monitoring indicators for intraday liquidity management 248 Sound Liquidity Risk Management: Principle 8: bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis... A bank should have o... capacity to measure expected daily gross liquidity inflows and outflows o... capacity to monitor intraday liquidity positions against expected activities and available resources o... ability to manage and mobilise collateral as necessary to obtain intraday funds o... a robust capability to manage the timing of its liquidity outflows. Intraday Liquidity defined by the CPPS: Fund which can be accessed during the business day, usually to enable financial institutions to make payments in real time. o Intraday Liquidity sources o Intraday Liquidity needs 2014 SAP AG. All rights reserved. 17

17 BCBS: Monitoring indicators for intraday liquidity management cont ed 248 Objective is to monitor the bank s usage and requirement in terms of intraday liquidity as well as the liquidity available. Intrayday liquidity stress scenarios needed. Following indicators have been defined: o o o o o o o o Daily maximum liquidity requirement Available intraday liquidity Total payments Time-specific and other critical obligations Value of customer payments made on behalf of financial institution customers Intraday credit lines extended to financial institution customers Timing of intraday payments Intraday throughput 2014 SAP AG. All rights reserved. 18

Needed environment for monitoring indicators for intraday liquidity management 248 Internal Sources Outside World Real time management of cash and collateral flows and positions

18 Needed environment for monitoring indicators for intraday liquidity management 248 Internal Sources Outside World Real time management of cash and collateral flows and positions across: Asset Class Currency Settlement Type Depositary Time Zone & Location Legal Entity Business Unit Product Analysis Cash & Collateral Reporting 2014 SAP AG. All rights reserved. 19

19 Monitoring indicators for intraday liquidity management Visualization 248 Daily maximum liquidity requirement Total payments Timing of Intraday Payments Intraday Throughput 2014 SAP AG. All rights reserved. 20

Agenda Introduction Regulatory challenges in Liquidity Risk Management

21 How will the LCR develop over time? Basic preparation needed Forward LCR Forecasting LCR s of interest as banks then have a chance to o Calculate impacts on potential changes o Hedge against anticipated developments Preparation example: BIS: BCBS 238: 146: Interpretation: Expected inflows from reverse repos may only be counted for LCR inflows if the underlying assets to return to the counterparty of a maturing reverse repo are actually available o Netting on ISIN basis o Asset Positions Uncapped Reverse Repo Inflows Capped Reverse Repo Inflows Simulation of Reverse Repos 2014 SAP AG. All rights reserved. 22

22 LCR view on 30 day time period has to be shifted into the future Forward LCR T 0 : Regular LCR NetOutflows: 30 day time period Non-maturity cash outflows (constant) Contractual cash outflows with maturity date up to and including the calculation date Contractual cash inflows with maturity date up to and including the calculation date 2014 SAP AG. All rights reserved. 23

23 Step from T 0 to T n to be managed in terms of cash flows, balances and positions Forward LCR NetOutflows: T 0 - T 4 T : Forward LCR NetOutflows: T day time period Non-maturity cash outflows (constant) Contractual cash outflows with maturity date up to and including the calculation date Contractual cash inflows with maturity date up to and including the calculation date 2014 SAP AG. All rights reserved. 24

24 Controlling forward calculation via Scenario Parameters Forward LCR Legend stable part volatile part converted to cash renewed 0% Cash conversion of volatile part (blue part of non-orange) 0% < factor cash < 100% >100% 100% all to cash increase scale Stability (orange part) 0% 0% < factor stable < 100% 100% Nothing rolled up to T 0+n and Factor cash x Item converted to cash Factor stable x Item =: Stable Part rolled up to T 0+n and Factor cash x Volatile Part converted to cash Everything rolled up to T 0+n and Nothing converted to cash 2014 SAP AG. All rights reserved. 25

26 Impact of potential re-classifications to be analyzed interactively Re-Classification Re-classifications could quickly be analyzed having o Different rule sets for different validation regimes and time validation schemes LCR A) Stock of high quality liquid assets (HQLA) a) Level 1 assets Fed Section Basel III Paragraph Amount/ market value Cash ,98 Reserve Bank balances 20 (a) (1) 50 b - Required Minimum Central Bank Reserve - Foreign withdrawable reserves (central bank) 20 (a) (2) ,00 Foreign Required Minimum Central Bank Reserve - Securities issued by U.S. Dep of Treasure 20 (a) (3) 50 b - Securities guaranteed by U.S. Dep of Treasure 20 (a) (3) 50 b - Securities issued by other U.S. Gov Agencies with full faith 20 (a) (4) 50 c - Securities guaranteed by other U.S. Gov Agencies with full faith 20 (a) (4) 50 c - Securities issued by stable non U.S. Gov Agencies with full faith (for example EZB) 20 (a) (5) 50 c - Securities guaranteed by stable non U.S. Gov Agencies with full faith (for example EZB) 20 (a) (5) 50 c - Securities issued by stable non U.S. Gov Agencies with full faith, not 0 % risk weight (also marketable in 20 (a) (6) 50 e time of stress) ,00 Securities guaranteed by stable non U.S. Gov Agencies with full faith, not 0 % risk weight (also marketable 20 (a) (6) 50 e in time of stress) - Total stock of Level 1 assets ,98 Adjustment to stock of Level 1 assets Annex 1 - Adjusted amount of Level 1 assets Annex ,98 b) Level 2A assets Fed Section Basel III Paragraph Market value Securities issued by an enterprise that is sponsored by U.S. Gov. (Investment grade below 12 CFR) 20 (b) (1) 52 (a) ,00 Securities guaranteed by an enterprise that is sponsored by U.S. Gov. (Investment grade below 12 CFR) 20 (b) (1) 52 (a) ,00 Securities issued by a aouvereign entity or a multilateral develoment bank 20 (b) (2) 52 (a) - Securities guaranteed by a souvereign entity or a multilateral develoment bank 20 (b) (2) 52 (a) - Securities guaranteed by a souvereign entity or a multilateral develoment bank w/ RFC 20 (b) (2) 52 (a) - Total stock of Level 2A assets 52 (a),(b) ,00 Adjustment to stock of Level 2A assets Annex 1 - Adjusted amount of Level 2A assets Annex , SAP AG. All rights reserved. 27

27 Forward Liquidity Exposures backtested with realized Payment Cash Flows Backtesting Reporting Liquidity Risk Management and Liquidity Management Forward Liquidity Exposure (t=0) Cash Liquidity (t=10) Backtest FLE (t=0) with Cash (t=10) D 3 D 5 D 7 D D D D D D D D D D D D D D 3 D 5 D 7 D D D D D D D D D D D D D D 3 D 5 D 7 D D D D D D D D D D D D D FLE Cash Cash FLE LIQUIDITY RISK MANAGEMENT LIQUIDITY MANAGEMENT Integrated Liquidity and Liquidity Risk Management 2014 SAP AG. All rights reserved. 28

28 Thank you! Thomas Schmale Solution Management Analytical Banking Industry Solutions Phone +49 (0) Mobil +49 (0)

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