Transcript Liquidity management in the context of the new regulatory

Liquidity management in the context of the
new regulatory environment
AFGAP – Scientific Committee’s annual seminar - April 5, 2012
European regulatory landscape before Basel III
A regulatory liquidity framework partially disconnected from the day to day LRM
• Not harmonized regulation across
Europe
• Application on an individual basis
• Regulatory framework does not
cover all the components of
liquidity risk management =>
generally limited to liquidity ratios
Accordingly, few resources and
little weight given to regulatory
ratios
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Liquidity Management in the context of a new regulatory environment
• Decree of October
12 2006
• Consultation
Paper April 21st
2009
Circular CBFA
2009 – 18 (May
8 2009)
Arrêté du 5 mai
2009
• § 25 ABA
(Austrian Banking Act)
• Liquiditätsverordnung
(FMA ,1993)
Liquiditätsverordnung Bafin
Dec. 06
• Law of April 5th
1993
• Circular IML 93
104
• Circular CSSF
07/301 6 July
2007
• Circular CSSF
09/403
© 2012 Deloitte
New regulation emerged to address the liquidity issue
As a consequence of a financial turnmoil, a large number of governmental,
regulatory and industry organisations are proposing regulations and other means to
sthrengthen frameworks for monitoring Liquidity Risk
BIS = Basel III Framework
International Regulatory
Framework
Capital
Liquidity
Credit Risik
Liquidity Risk
Market Risk
Sound
Principles**
International
Framework*
* “International framework for liquidity risk measurement,
standards and monitoring“ of the BIS / December 2009
** “Principles of Sound Liquidity Risk Management and
Supervision” of the BIS / September 2008
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Strenghtening Liquidity Standards (I & II)
Dec 08-Dec 09
ACP
Risk
Op. Risk
FSA
Liquidity Management in the context of a new regulatory environment
Arrêté du 05 mai 2009
CEBS
•Technical advice on Liquidity risk
management - 2007 / 2008
•Guidelines on liquidity buffer -2009
•Guideline on Stress Testing – Dec 09
•Draft guidelines on Liquidity cost benefit
allocation - 2010
© 2012 Deloitte
Characteristics of current LRM
Overview
• Taken into account the difficulties experienced during the recent financial crisis
and the recommendations from regulators / market expectations, banks have
already significantly improved their Liquidity Risk Management framework since
several years
• LRM is, in general, articulated around the following areas :
Short Term
•Short Term ratio
•Survival time (cash flow)
• Liquidity gaps
• Intra-day framework
Concentration of funding
sources
•Counterparties
•Market / Instrument type
• Tenor concentration
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Long Term Structural
•Structural limits
•Liability / Asset ratios
Contingency Funding Plan
•Triggers to initiate CFP
•Escalation procedure
•Definition of
countermeasures
Liquidity Management in the context of a new regulatory environment
Liquidity buffer
•Level of highly liquid
marketable securities
Stress tests
•Idiosyncratic
• Systemic
• Hybrid
© 2012 Deloitte
Characteristics of current LRM
Short term monitoring : cash flow planning
Cash flow Planning
•All foreseeable cash flows shall be captured (incl. those from off-balance
sheet commitments and liabilities)
Deterministic view on future cash flows
Cashflow
in
Stochastic view
time
Cashflow
out
Data Warehouse
ADIDAS AG INHABER-AKTIEN O.N.
BGL BNP PARIBAS MEDIUM TERM….
Risk Warehouse
Mapping
Process
…
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Risk Factor 1 = Risk Factor 1 (time, amount,…)
Risk Factor 2 = Risk Factor 2 (time, amount,…)
…
Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Characteristic of current LRM
Stress tests
Liquidity Stress Tests - Micro structural
Approach
Answer:
modeling the order book:
Question: “How much can be liquidated at once and
at which discount?”
Actual Distribution of Orders
Volume of Orders
 Understanding of the order book and its dynamic
Price
495 shares can be sold at once at an average
price of 95,15
But how is this result dependent on different
market conditions?
Volume of Orders
Stressed Distributions of Orders
average liquidation
price:
94,17
93,06
91,29
Price
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Basel III international framework : a new deal ?
More pressure on the liquidity risk
management
From the regulator :
Basel III framework
• LCR
• NSFR
• Other metrics to
monitor liquidity risk
From the market :
• Consequences of the
difficulties experencied by
the financial institutions
during the recent financial
crisis
• Expect Basel III
requirements to be met
today !
Regulators poised to soften new
bank rules
The move follows complaints from banks that the new
Basel III standards on liquidity – the first international
rules of their kind – would force them to sharply curtail
lending to consumers and businesses.
Financial times Sept 5, 2011
Europe's debt crisis prompts
central banks to provide dollar
liquidity
European and US stocks surge on news that world
banks will flood markets – but Lagarde warns of
'dangerous' new phase
The Guardian Sept 15, 2011
Five Steps to Solving Europe’s
Debt Crisis
NY times August 21, 2011
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Basel III international framework : a new deal ?
• Basel III framework will not lead to ‘deep’ changes in the LRM as it, most of the
time, already allows to cover the different liquidity risk components
• This will allow for a convergence between operational LRM and regulatory
framework
Short Term
•Short Term ratio LCR
•Survival time (cash flow)
• Liquidity gaps
• Intra-day framework
Concentration of funding
sources
•Counterparties
•Market / Instrument type
• Tenor concentration
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Long Term Structural
•Structural limits
•Liability / Asset ratios
•NSFR
Contingency Funding Plan
•Triggers to initiate CFP
•Escalation procedure
•Definition of
countermeasures
Liquidity Management in the context of a new regulatory environment
Liquidity buffer
•Reduction of the scope
of the eligible assets to
the liquidity buffer
Stress tests
•Complementary
scenarios (EBA, FMI)
© 2012 Deloitte
Impacts on Liquidity Risk Management
Produce LCR & NSFR ratios
• Challenge in terms of IT architecture.
• Key points to address are the following
Frequency
Data
•Quarterly publication
required by CRD 4
• Rely as much as
possible on accounting
data
•However, ratio to be
monitored on a more
frequent basis(at
least monthly)
• Additional data from
other sources (FO or
ALM systems,…)
Scope
• By default, calculated
on an individual basis
• Weavers for a
calculation on a
consolidated basis
• Consolidated ratio
required for financial
communication
• On the top of that, a lot of points to be precised by the EBA with respect to
 The format of the reportings
 The criteria for liquid assets

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% on off B/S items
Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Impacts on Liquidity Risk Management
Manage the Liquidity buffer
• Modify current investment policies in order to focus on eligible liquid assets
• Governments bonds
• Corporate bonds with high rating
• Increase the stock of liquid assets through « auto-securitizations »
Bank A
SPV
Assets
AA / AAA Notes
Liquidity buffer
• A very tightened Collateral management :
• Post as much as possible securities not eligible as liquid assets
• Control of the costs through active management of assets and liabilities
Example : asset swap inflation linked government bonds strategies
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Impacts on Liquidity Risk Management
Invoice liquidity costs (1/2)
• Liquidity spread was–generally- included in the FTP calculation
methodology :
FTP : Interest Rate Component + liquidity Component
%
Based on money market
rates for a given maturity
Funding
Swap
Govies
Liquidity spread is the
premium for a specific
contractual maturity relevant
to cost of funding
time
• FTP should now take into account the cost related to Liquidity Buffer
FTP : Interest Rate Component + liquidity Component + Liquidity buffer costs
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Impacts on Liquidity Risk Management
Invoice liquidity costs (2/2)
• How to calculate costs related to liquidity buffer ?
Yield of the assets
Low credit risk
Central bank eligible
…
Cost of carry
•Shortest maturity = 30
day
•More longer maturities
can be chosen to
ensure the buffer can
withstand significant
periods of market
stress
• Other points to consider : should or can liquidity premium be fixed at origin
?
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Impacts on Liquidity Risk Management
Cartography of the Off Balance Sheet Commitments
• Off Balance sheet commitments will be weighted more :
‒ Retail : 5%
‒ Sovereign / non financial : 10%
• Operational impacts :
‒ Be able to screen off balance sheet commitments more precisely than today (by
type of counterparts).
‒ Invoice the liquidity costs to the business lines holding the OBS positions
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Impacts on Liquidity Risk Management
Still time to change Basel III rules !
• Many open points for which regulatory rules may evolve :
‒ Criteria for the definition of liquid assets (level 1 or 2)
‒ Run off factors on Corporate deposits (75%)
‒ …
• Other points to discuss with local regulators / authorities :
‒ ECB repos : decrease of the haircuts on collaterals
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Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte
Next step : to an integrated monitoring framework for P&L,
capital and liquidity
To an integrated
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Capital
 P&L oriented
 Monitoring
based on
budget
forecasts
 Limited
actions (cost
cutting)
 Metrics by business line : LCR ? Liquidity
B/S ?
 Regulatory and operational perimeters
differ
 Operational insertion to be done by
invoicing liquidity costs to the business
lines
 Challenges in terms of process and IT
architecture : internal contracts, day to day
monitoring, collateral management
Business
lines
Costs
monitoring
Monitoring
by P&L
 Basel II has led to the set up of ICAAP &
capital planning processes
 More and more constraints in terms of
solvability and complex analysis rules
implying a more refined and more
frequent monitoring framework for capital
Liquidity
Liquidity and capital are included
monitoring
framework
 Monitoring framework including
3 pillars : P&L, Capital and
Liquidity
 Challenges in terms of IT
Architecture : volume of
operations, data model,
calculations capacities
 Insertion in the Group’s
strategy through common
metrics
 A monitoring of business lines
to be adapted : change
management, renewal of
performance indicators
• Pressure on costs reductions in order to
maintain ROE levels
 A new framework for monitoring the
performance of business lines to be
implemented
Liquidity Management in the context of a new regulatory environment
© 2012 Deloitte