Let us look at the summary of the broad thinking on liquidity management based on different papers available.
I. Latest is the Dec 2008 UK FSA consultative paper on liquidity. The industry feedback closed early this month 9th March 2009 and we should see the response soon.
This was FSA quick response to drive a fundamental refresh of the liquidity management approach and requirements. The FSA’s consultative paper focus is to suggest measures that would take liquidity risk management to the next level, influencing future business models and improvements to its own ability to monitor and supervise industry wide liquidity management oversight.
Future blueprint of liquidity Management: Broadly the key tenets of the changes being proposed by FSA are:
• A new, quantitative framework for liquidity risk management which places greater emphasis on firms’ ability to assess liquidity risks and develop policies to tackle them
• a strengthened qualitative framework for liquidity risk management, with an increased focus on firms’ stress testing and contingency funding plans;
• new liquidity reporting requirements;
• a new approach to firms operating in the UK which are part of a wider UK or international group
• Cost benefit analysis (CBA) that clearly articulates the long-term impact of a strong liquidity framework
• Combination of an individual liquidity adequacy assessment (ILAA) and a supervisory liquidity review process (SLRP) conducted by FSA
• Most importantly also calls out that this would have impact on the business models going forward, so its not business as usual
Going into more specifics, some of the key pillars around this new requirements are:
A. Adequate liquidity and self sufficiency – 2 high-level principles. 1. All FSA-regulated entities must have adequate liquidity 2. No dependence on other divisions of their group to survive liquidity stresses, unless permitted to do so by the FSA.
B. Systems and controls framework- A new systems and controls framework based on the recent work of the Basel Committee on Banking Supervision (BCBS) and the Committee of European Banking Supervisors (CEBS).
C. Individual Liquidity Adequacy Standards (ILAS) – A new domestic quantitative framework for liquidity management for many of the firms that we supervise. This framework is based on firms being able to survive liquidity stresses of varying magnitude and duration.
D. Group-wide and crossborder management of liquidity - New framework for allowing firms, through waivers and modifications, to deviate from self sufficiency where this is appropriate and would not result in undue risk to consumers and other stakeholders whom the rules in question are intended to protect.
E. Reporting - A new reporting framework for liquidity, which will enable us to collect granular, standardised liquidity data at an appropriate frequency so that we can form firm-specific, sector- and market-wide views on liquidity risk exposures.
Some of the reporting frequency being suggsted:
- Enhanced Mismatch Report, incl. daily flows out to three months - Weekly, with the ability to report daily
(switches to daily in crisis times or if firm deviates from ILG)
- Pricing Data Daily pricing, Submitted weekly
- Marketable Assets Report Monthly
- Funding Concentration Report Monthly
- Retail Funding Report Quarterly
- Off-Balance Sheet Report Monthly
- Clearing & Settlement Banks Only - Intra-day Liquidity Report Daily
- Systems and Controls Questionnaire Quarterly
Expected Impact:
- Enhanced liquidity risk management capabilities, including greater use of stress testing and improvements to contingency funding plans (CFPs);
- less reliance on short-term wholesale funding, including on wholesale funding from foreign counterparties
- greater incentives for firms to attract a higher proportion of retail time deposits
- a higher amount and quality of stocks of liquid assets, including a greater proportion of those assets held in the form of government debt; and
- a check on unsustainable expansion of bank lending during favourable economic times
Interestingly the paper also calls out some of FSA own internal improvements initiatives listed below. So there is inherent recognition of need to step up its own expertise, skills and in terms of committing to set the bar higher for itself as well as the industry. I know of some regulators and supervisors that are ahead of the game and actively seek and acquire top class talent, but it would be good to see more countries take the pro-active approach.
1.Upgrade systems, embed new procedures into existing supervisory processes and help their staff deliver the high expectations that we require of firms
2. Upgrade of internal systems so FSA is capable of delivering and managing its proposed new reporting framework. Includes advanced business intelligence BI) capabilities, automated analysis and early warning indicators. FSA’s ARROW6 technology infrastructure is also being upgraded to allow for liquidity risk assessments and returns data to feed directly into FSA’s risk architecture, allowing for
aggregated liquidity risk monitoring.
3. Investing in further specialist liquidity resource, including retaining and developing liquidity risk experts.
4.Investing to help ensure that all its supervisors are competent in
liquidity issues. Every supervisor will receive training on liquidity, its liquidity policy and its internal policies and procedures for ensuring the implementation and maintenance of high liquidity standards at firms.
5. Regular self assesment of competence in liquidity area regularly
II. Early 2007 & Sept 2008 - Committee of European Banking Supervisors CEBS): Key principles:
• an agreed framework for host supervisors delegating liquidity supervision of branches of EEA credit institutions to the European consolidated supervisor;
• exploratory work on internal models and methodologies for liquidity risk management;
• supervisory guidance on the use of transfer pricing mechanisms
• development of common reporting for liquidity throughout the EEA (European Economic area)
III. Sept 2008 - Basel Committee of Banking Supervision issued its guideline on Principles for sound liquidity management:• consistent global implementation of the recently agreed Principles for Sound Liquidity Risk Management and Supervision
• agreed global standards for supervisors on the appropriateness of cross-border management of liquidity
• developing cross-border resilience benchmarking exercises on internationally active groups
• further moves torward consistency on the definition of liquid asset buffers
• exploratory work on internal models and methodologies for liquidity risk management
• further work to understand and mitigate intra-day liquidity risks run by firms.
Sources:
http://www.fsa.gov.uk/pubs/cp/cp08_22.pdf
www.bis.org/publ/bcbs138.pdf
www.c-ebs.org/formupload/f8/f8c4ac3d-ca0a-4e86-8aae-d5c6f97f6192.pdf
