Liquidity Risk Supervision of Large Banking Organizations

Transcription

1 Liquidity Risk Supervision of Large Banking Organizations October 28, 2014 Any opinions expressed are the authors alone and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System

2 Topics Reflecting (just a bit) on lessons learned from the crisis Supervisory Response Quantitative Liquidity Measures LCR and NSFR Interagency Policy Statement on Funding and Liquidity Risk Management Liquidity requirements of Reg YY (DFA Section 165) Reporting Requirements 2052 and LCR reporting Horizontal Liquidity Reviews 2

3 Lessons Learned from the Crisis Firms had a high reliance on short term wholesale funding Firms did not fully capture all the liquidity risks in their portfolio and size them appropriately Firms relied on contingency funding sources to meet liquidity outflows and did not have robust on balance sheet liquidity buffers Firms overall contingency funding plans were not well articulated Senior management and the board of directors were not wellinformed of overall liquidity risk 3

4 Supervisory Response More differentiation, based on size and systemic footprint (and a focus on SIFIs) More horizontal coordinated views and reviews Expansion of purview beyond banks Increased International Coordination Introduction of standardized minimum quantitative liquidity requirements (for the first time) 4

5 Overview of select Liquidity Guidance and Rules September 2008 Basel issued principles for Sound Liquidity Risk Management March 2010 Interagency Policy Statement on Funding and Liquidity Risk Management January 2013 Basel III Liquidity Coverage Ratio January 2014 BCBS NSFR Consultative Document Feb 2014 DFA 165 Enhanced Liquidity Requirements Sept 2014 U.S. LCR for largest, internationally active banking organizations U.S. Modified LCR for BHCs above $50 billion but below internationally active 5

6 Quantitative Liquidity Standards BCBS approved two liquidity rules for global banks in December 2010: Liquidity Coverage Ratio (LCR) 30 day horizon (effective ) Requires firms to have a stock of high quality liquid assets that exceeds standardized net cash outflows over a 30 day stress period. Net Stable Funding Ratio (NSFR) one year horizon (effective in 2018) NSFR is a longer term structural metric designed to ensure banks funding structures are appropriate relative to their asset and offbalance sheet profile. 6

7 Scope of Application: U.S. LCR US LCR rule Applies to internationally active banking organizations, and non bank financial companies designated by the FSOC that do not have substantial insurance operations. Generally includes BHCs and SLHCs with at least $250 billion in consolidated assets or $10 billion in foreign exposures, and their largest bank subsidiaries (>$10 billion in assets). Less rigorous LCR ( Modified LCR ) Applies to non internationally active BHCs and SLHCs (but not banks) that are subject to DFA 165. Generally includes BHCs and SLHCs with at least $50 billion but less than $250 billion in consolidated assets. Separately considering how best to tailor the liquidity requirements for companies not covered by this proposal (e.g. those with substantial insurance operations, and the IHCs of FBOs) 7

8 Rationale for Modified LCR BHCs subject to Modified LCR are sufficiently large/ complex to be subject to a quantitative liquidity requirement promoting their liquidity resilience and allowing market participants and supervisors to better compare firms liquidity position BHCs subject to Modified LCR face a less stringent liquidity requirement because: Tend to be less complex due to smaller asset size and lower level of foreign activity Activities are less systemic in nature than internationally active firms Consistent with gradation requirement in DFA 165, and help mollify the cliff affect 8

9 Differences of Proposed Modified and Required LCR Required LCR Applied to internationally active banking organizations, and nonbank financial companies designated by the FSOC that do not have substantial insurance operations. Contractual outflows and inflows recognized in the first 30 days Full non maturity outflow rates apply Net outflows and inflows calculated on the peak maximum cumulative outflow date within the 30 day period. Modified LCR Applied only to the consolidated BHC and not to the bank subsidiaries non maturity outflow rates subject to a multiplier of 70% Net outflows and inflows would be calculated only at the end of the 30 day period and not on the peak maximum cumulative outflow date within the 30 day period 9

10 How U.S. LCR fits into Regulatory Framework Establishes a stress scenario Assigns specific Haircuts to assets Runoff rates to liabilities Draw rates to commitments Calculates surplus/deficit So far so good, but.... One scenario, one time frame, cannot reveal all liquidity vulnerabilities specific to afirm Assumptions are standard, not tailored to the products and markets in which each institution is operating Not designed to be a risk management program Regulatory compliance is necessary, but not sufficient Can provide a useful framework from which to build/improve liquidity stresstesting exercise 10

11 Interagency Policy Statement on Funding and Liquidity Risk Management (SR 10 6) Corporate Governance board of directors and senior management Strategies, policies, procedures and risk tolerances Liquidity risk measurement and reporting Intraday liquidity position management Diversified funding Cushion of liquid assets Contingency funding plans Internal controls 11

12 DFA 165: Enhanced Liquidity Requirements Section 165 of the DFA directed the FRB to establish stricter prudential standards for all BHCs with $50 billion or more in total assets and nonbank SIFIs, and that the stricter standards must include liquidity requirements. The rule includes: Governance requirements that specify board, risk committee, and senior management responsibilities, in addition to independent evaluation requirements. Requires firms to conduct regular stress testing, conduct cash flow analysis, and set certain liquidity risk limits. Requires covered companies to maintain a buffer of highly liquid assets against internal 30 day (bank derived, supervisor reviewed) liquidity stress tests. Requirements for foreign companies to maintain asset buffers in the U.S. 12

13 Internal Stress Test and LCR, complementary tools Limitations of one size fits all regulatory construct Reg YY provides expectations and framework for conducting liquidity stress testing (scenario type, time buckets, etc) Buffer sizing requirement based upon meeting outflow estimates under 30 day internal stress test Some stipulations on buffer qualification Watching that does not create disincentive to run sufficiently stressful scenarios Defaulting to LCR scenario, asset/liability categorization, and assumptions (haircuts/runoffs) for internal stress tests is not sufficient 13

14 Internal Stress Test coverage vs. LCR 450% 400% 350% 300% Coverage Ratio 250% 200% 150% 100% 50% 0% FIST = Firm Internal Stress Test: results of firms most severe scenario, including all contingent sources, as measured by internal MIS LCR FIST 14

15 Timeline for Liquidity Rules and Reviews DFA 165/Reg YY liquidity standards Compliance required for domestic firms and foreign owned US BHCs January 1, 2015 Foreign firms IHC formation plans to be submitted by Jan 2015, to be formed by mid 2016 US implementation of Basel III LCR Finalized Sept 2014 Muni HQLA inclusion proposal (an amendment to the final rule) to come Application to FBOs to come Basel NSFR Expect to be finalized at the BCBS in 2014 (for 2018 implementation) Expect US proposal to implement the NSFR to follow Liquidity supervisory reporting Finalized 2052 (a + b) liquidity reporting in August 2014, reporting to begin soon LCR reporting requirement to come Horizontal Liquidity Reviews CLAR for top LISCC firms in its third year LBO horizontal liquidity reviews commenced in

16 Liquidity Supervisory Reporting Report Number FR 2052a FR 2052a FR 2052b FR 2052b Reporter Description U.S. BHCs that the Financial Stability Board designated as Global Systematically Important Banks (G-SIBs) Foreign banking organizations with U.S. broker/dealer assets > $100 billion U.S. BHCs (excluding G-SIBs) with total consolidated assets greater than $50 billion (including FBO subsidiaries) U.S. BHCs (not controlled by FBOs) with total consolidated assets of between $10 billion and $50 billion. Frequency As-of Date Submission Date Daily 09/11/ /15/2014 On Occasion (FR 2052a; complete report) Twice a month (FR 2052a; abbreviated report) TBD Advanced notice from supervisors 09/11/2014 TBD Advanced notice from supervisors 09/15/2014 Monthly 11/30/ /15/2014 Quarterly 12/31/ /15/

17 Bart Miller Market & Liquidity Risk Supervision Federal Reserve Bank of Chicago 17