Liquidity management in the context of the new regulatory environment

Liquidity management in the context of the new regulatory environment

AFGAP Scientific Committees annual seminar - April 5, 2012

Titre de la prsentation - Date

2012 Deloitte

European regulatory landscape before Basel IIIA 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

Liquidity Management in the context of a new regulatory environmentArrt du 5 mai 2009Circular CBFA 2009 18 (May 8 2009)Decree of October 12 2006Consultation Paper April 21st 2009Liquiditts-verordnung Bafin Dec. 06Law of April 5th 1993Circular IML 93 104Circular CSSF 07/301 6 July 2007Circular CSSF 09/403 25 ABA (Austrian Banking Act) Liquidittsverordnung (FMA ,1993)

Titre de la prsentation - Date

2012 Deloitte

New regulation emerged to address the liquidity issue

*Liquidity Management in the context of a new regulatory environmentAs 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 FrameworkFSA* 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 Strenghtening Liquidity Standards (I & II)Dec 08-Dec 09ACPArrt du 05 mai 2009CEBSTechnical advice on Liquidity risk management - 2007 / 2008Guidelines on liquidity buffer -2009Guideline on Stress Testing Dec 09Draft guidelines on Liquidity cost benefit allocation - 2010

Titre de la prsentation - Date

2012 Deloitte

Characteristics of current LRM Overview

*Liquidity Management in the context of a new regulatory environmentTaken 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 yearsLRM is, in general, articulated around the following areas :

Short TermLong Term StructuralLiquidity bufferShort Term ratioSurvival time (cash flow) Liquidity gaps Intra-day frameworkStructural limitsLiability / Asset ratiosLevel of highly liquid marketable securitiesConcentration of funding sourcesContingency Funding PlanStress testsCounterpartiesMarket / Instrument type Tenor concentrationTriggers to initiate CFPEscalation procedureDefinition of countermeasuresIdiosyncratic Systemic Hybrid

Titre de la prsentation - Date

2012 Deloitte

Characteristics of current LRM Short term monitoring : cash flow planning *Liquidity Management in the context of a new regulatory environmentDeterministic view on future cash flowsStochastic viewCash flow Planning

All foreseeable cash flows shall be captured (incl. those from off-balance sheet commitments and liabilities)

Data WarehouseRisk WarehouseADIDAS AG INHABER-AKTIEN O.N.Risk Factor 1 = Risk Factor 1 (time, amount,)BGL BNP PARIBAS MEDIUM TERM.Risk Factor 2 = Risk Factor 2 (time, amount,)

Titre de la prsentation - Date

2012 Deloitte

Characteristic of current LRMStress tests*Liquidity Management in the context of a new regulatory environmentLiquidity Stress Tests - Micro structural Approach

Question: How much can be liquidated at once and at which discount?

Understanding of the order book and its dynamic

495 shares can be sold at once at an average price of 95,15But how is this result dependent on different market conditions?

average liquidation price:

94,1793,0691,29 Answer: modeling the order book:

Titre de la prsentation - Date

2012 Deloitte

Basel III international framework : a new deal ?

*More pressure on the liquidity risk management

Liquidity Management in the context of a new regulatory environmentFrom the regulator : Basel III framework LCRNSFROther metrics to monitor liquidity risk From the market : Consequences of the difficulties experencied by the financial institutions during the recent financial crisisExpect Basel III requirements to be met today !Europe's debt crisis prompts central banks to provide dollar liquidityEuropean and US stocks surge on news that world banks will flood markets but Lagarde warns of 'dangerous' new phase

The Guardian Sept 15, 2011Five Steps to Solving Europes Debt Crisis

NY times August 21, 2011Regulators poised to soften new bank rulesThe 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

Titre de la prsentation - Date

2012 Deloitte

Basel III international framework : a new deal ?

*Liquidity Management in the context of a new regulatory environmentBasel 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 componentsThis will allow for a convergence between operational LRM and regulatory framework

Short TermLong Term StructuralLiquidity bufferReduction of the scope of the eligible assets to the liquidity bufferConcentration of funding sourcesContingency Funding PlanStress testsCounterpartiesMarket / Instrument type Tenor concentrationTriggers to initiate CFPEscalation procedureDefinition of countermeasuresComplementary scenarios (EBA, FMI)

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementProduce LCR & NSFR ratios*Liquidity Management in the context of a new regulatory environmentChallenge in terms of IT architecture.Key points to address are the following

On the top of that, a lot of points to be precised by the EBA with respect toThe format of the reportingsThe criteria for liquid assets % on off B/S items

FrequencyQuarterly publication required by CRD 4However, ratio to be monitored on a more frequent basis(at least monthly)DataRely as much as possible on accounting data Additional data from other sources (FO or ALM systems,)ScopeBy default, calculated on an individual basisWeavers for a calculation on a consolidated basisConsolidated ratio required for financial communication

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementManage the Liquidity buffer*Liquidity Management in the context of a new regulatory environmentModify current investment policies in order to focus on eligible liquid assetsGovernments bondsCorporate bonds with high rating

Increase the stock of liquid assets through auto-securitizations

Control of the costs through active management of assets and liabilitiesExample : asset swap inflation linked government bonds strategies

AssetsAA / AAA NotesBank A Liquidity bufferSPVA very tightened Collateral management :Post as much as possible securities not eligible as liquid assets

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementInvoice liquidity costs (1/2)

*Liquidity spread wasgenerally- included in the FTP calculation methodology :

FTP : Interest Rate Component + liquidity Component

Liquidity Management in the context of a new regulatory environmentFTP should now take into account the cost related to Liquidity Buffer

FTP : Interest Rate Component + liquidity Component + Liquidity buffer costs

Liquidity spread is the premium for a specific contractual maturity relevant to cost of fundingBased on money market rates for a given maturity

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementInvoice liquidity costs (2/2)

*How to calculate costs related to liquidity buffer ?

Other points to consider : should or can liquidity premium be fixed at origin ?

Liquidity Management in the context of a new regulatory environmentYield of the assetsCost of carryLow credit riskCentral bank eligibleShortest maturity = 30 dayMore longer maturities can be chosen to ensure the buffer can withstand significant periods of market stress

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementCartography of the Off Balance Sheet Commitments*Off Balance sheet commitments will be weighted more :Retail : 5% Sovereign / non financial : 10%

Liquidity Management in the context of a new regulatory environmentOperational 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

Titre de la prsentation - Date

2012 Deloitte

Impacts on Liquidity Risk ManagementStill 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%)

Liquidity Management in the context of a new regulatory environment

Other points to discuss with local regulators / authorities :ECB repos : decrease of the haircuts on collaterals

Titre de la prsentation - Date

2012 Deloitte

Next step : to an integrated monitoring framework for P&L, capital and liquidity*Liquidity Management in the context of a new regulatory environmentMonitoring by P&LLiquidity and capital are includedP&L oriented Monitoring based on budget forecasts Limited actions (cost cutting)Basel II has led to the se