Liquidity Risk Management: Business and Regulatory Trends

Transcription

1 Liquidity Risk Management: Business and Regulatory Trends IIF CRO Forum June 13-14, 2013

2 Agenda Business considerations that impact liquidity Highlights our liquidity survey The financial reform landscape still appears complex Liquidity international standards LCR, NSFR, disclosure Intraday liquidity Regulatory developments Pre-Basel III in Brazil Necessary action items Liquidity Risk Management Framework Takeaways Page 2

3 Business considerations that impact liquidity Topic Funding Description Strategic /long term- High reliance on short term funding Systemic - Stability of funding base under stress (limited 2008 stress) Cost allocation For international banks appropriateness of allocation of funding costs to operations (FTP). Assets Concentration on Treasuries. Large investments in treasuries (L1) result in comfortable liquidity positions. What would happen if certain countries enter in stress? Balance Sheet Coverage Non-banking business. Financial entities include multiple nonbanking businesses (e.g. insurance) Infrastructure. Material liquidity risk outside the banking operations and limited infrastructure to manage the aggregated risk Page 3

4 Highlights from our liquidity survey Our 2013 liquidity survey focused on Brazilian banks that comprised 73% of the assets in banks. Key findings FTP is not a priority despite being a priority for European and American Banks Limited infrastructure and reporting capabilities. Liquidity enhancements are seen as an evolution rather than a revolution Limited stress testing capabilities Data needed for liquidity is the key challenge in and outside LatAm Page 4

5 The financial reform landscape still appears complex OTC derivatives Central clearing Standardized contracts Margin Capital Collateral Reporting Basel III Capital Composition Deductions RWA (trading book, securitization, CCR,) Buffers (conservation, countercyclical, G-SIB) Stress testing Disclosures Other initiatives Securitization Consumer protection Investor protection Shadow Banking Basel III liquidity LCR NSFR Stress testing Reporting Global Regulatory Reform agenda Bank levy UK France Germany Resolution and recovery planning Resolution Recovery Large Exposures Bail-in Cross-border issues National initiatives Volcker Vickers Linaken (EU) Swiss Finish Risk governance Board expectations Risk appetite Risk Data and IT infrastructure Regulatory reform initiatives are making fragmented business models a reality - capital, liquidity risk, RRPs, OTC derivatives...etc. Legal entity requirements and jurisdictional differences are making trapped liquidity and capital along with international level playing fields less of a supervisory and regulatory concern Example: Binding capital constraints BCBS standards versus national requirements and stress tests Page 5

6 International Standards - still subject to clarification LCR Finalized and phased-in... but expect FAQ s and market constraints Phase-in may be nullified by market expectations FAQ s needed for SFTs, HQLA s (equities), operational deposits...etc. NSFR Disclosure Intraday Fundamental review underway Significant concerns surrounding maturity transformation function of banks Consistency with, and overlap of, other regulatory reform initiatives Trade-offs between simplicity and risk sensitivity in dealing with cliff (30 day<1 year) effects and calibration of the stability of sources and liquidity of uses Role of management actions, CFPs, and RRPs over longer-term scenarios Tension between investors and supervisors FSB Enhanced Disclosure Task Force (EDTF) has established a first step in industry standards Maturity ladders contractual or behavioural? Timing of disclosure of LCR and use of buffer a key consideration for supervisors Primarily payment systems focused Page 6

7 Regulatory developments Pre-Basel III in Brazil Resolution Effective date January 1 st, 2013 Governance Banks should have a liquidity risk management structure appropriate to the complexity of the bank. A liquidity risk management policy and strategy to manage the risk properly document with limits The institution must appoint a director responsible for the risk Requires a process to identify, measure, monitor and control liquidity risk The liquidity risk must be managed for at least the first 90 days and include intraday liquidity Include all operations including capital markets and off balance sheet (undrawn facilities, guarantees ) Liquidity risk management should be independent from business and Internal Audit Scope includes all the institutions part of the bank including subsidiaries Evaluate the process to identify, measure, monitor and control liquidity risk at least once a year. Cash flows Ability to generate cash flows expected (contractual) AND unexpected (stress) Ability to generate cash flows for at least 90 days. Funding Diversified funding sources and maturities Stress tests Stress test: Long and short term, idiosyncratic and systemic. New products Assess liquidity risk of new products as part of the new products approval Disclosures Public disclosures on the liquidity risk management structure Board (or directors in board s absence) must be responsible for the disclosures Page 7

8 Necessary Action Items Gap assessments against new regulatory requirements Governance, data, reporting and stress testing capabilities Leverage ALM framework for liquidity reporting, governance and risk management Enhance governance including cascading of risk appetites from the Board down Implement operating models that align liquidity risk with other treasury functions, as well as with other corporate functions and business lines Improve funds transfer pricing methodologies, reporting and profitability analysis Enhance granularity and understanding of behavioural characteristics of liabilities Deposits significant concern regarding transition from current low rate environment and market share expectations Operational deposits - need for more precise assessments of stability Collateral management Interest rate risk and deposit pricing expectations an increasing concern Include liquidity risk and ALM models in model risk management efforts Page 8

9 Liquidity Risk Management Framework To manage liquidity risk, firms measure and monitor liquidity risk through the following: 1) Risk Appetite and Governance 2) Stress Testing 3) Contingent Funding Planning 4) Strategic Funding Planning 5) Funds Transfer Pricing 6) Reporting: Management and Regulatory Key activities for effective and efficient liquidity risk management 2) Stress Testing 1) Risk Appetite and Governance LIQUIDITY RISK 6) Reporting 3) Contingent Funding Planning 5) Fund Transfer Pricing 4)Strategic Funding Planning Page 9

10 Key takeaways No size fits all when it comes to liquidity Understand your bank unique liquidity risk profile Prioritize key liquidity risk management activities and responsibilities (including the board). Assess current capabilities against target A liquidity risk management program takes time to implement Average to implement a new approach is 2 years Compliance with LCR is in 2015 but Investor expect banks to disclosure and comply with B3 earlier Create the right incentives for the organization to preserve and price liquidity appropriately (FTP) Page 10