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Managing Liquidity in a New Regulatory Era VP ... - Strategy& · PDF fileManaging Liquidity in a New Regulatory Era ... Regulatory StandardsMonitoring ToolsFurther Implementation Guidelines

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  • Philipp WackerbeckPeter GassmannRobert Fiedler

    Perspective

    Managing Liquidity in a New Regulatory EraThe Tactical and Strategic Challenges for Banks

  • Booz & Company

    Contact Information

    AmsterdamDavid [email protected]

    BeirutDr. Mazen [email protected]

    DCJack [email protected]

    DubaiGeorge [email protected]

    Florham Park, NJRamesh [email protected]

    FrankfurtDr. Peter [email protected]

    LondonAlan GemesSenior [email protected]

    MilanStefano [email protected]

    Roberto BartocettiExecutive [email protected]

    MunichDr. Johannes BussmannPartner [email protected]

    Dr. Philipp [email protected]

    New YorkPaul HydeSenior Partner +1-212-551-6069 [email protected]

    Gauthier VincentSenior Executive [email protected]

    So PauloIvan de SouzaSenior [email protected]

    Gustavo RoxoSenior Executive [email protected]

    Shanghai Andrew [email protected]

    SydneyVanessa [email protected]

    ZurichDr. Daniel [email protected]

  • 1Booz & Company

    EXECUTIVE SUMMARY

    First, there are tactical and opera-tional measures that banks treasury departments need to consider. These include managing the liquidity cover-age ratio (LCR) and the net stable funding ratio (NSFR) set by Basel III.

    Second are strategic funding issues. Before the crisis, liquidity was gener-ally so cheap and available that banks could easily fund new business. That is no longer the case. At many banks, funding has become a significant brake on new business generation. Banks need to analyze the impact of the new liquidity environment on their ability to pursue their business models. Its not only the regulators

    that are forcing banks to rethink their funding strategies; key stakeholders such as investors, rating agencies, and business partners increasingly expect banks to demonstrate sufficient and reasonably priced funding.

    Those banks that fail to develop alter-native sources of funding will need to adjust their business models signifi-cantly. In the pre-crisis era, banks had the luxury of pursuing purely asset-driven business models, but we expect to see a widespread switch toward liability-driven business models. On both the tactical and strategic fronts, Booz & Company proposes several options for banks to consider.

    During their meeting in Seoul in November 2010, to strengthen the resilience of the global financial industry, the G-20 countries approved the new rules for banking regulation known as Basel III. Since then, industry leaders have hotly debated the capital and risk management aspects of the new rules, and banks in many jurisdictions have taken steps to increase their capital bases and enhance risk management frameworks. Less discussed have been the equally important provisions governing bank funding and liquidity management. These rules will have a more fundamental impact on banks business models than many executives expect.

  • 2 Booz & Company

    The Basel Committee on Banking Supervision (BCBS) issued a global regulatory framework, known as Basel III, in December 2010 to create more resilient banks and banking systems.

    Although Basel IIIs new liquidity management requirements phase in over several years, with some portions not coming into effect until 2018, time is growing short.

    The capital markets expect banks to comply with the new regulations far ahead of the official regulatory deadlines. This means that the treasury departments in many financial services institutions must adjust their operations as soon as possible.

    Basel III requires that a bank meet both short-term and longer-term liquidity ratios. These ratios measure the banks potential cash outflows against hypothetical inflows from assets considered repossessable or salable. Exhibit 1 shows the domains that the BCBS established for changes to the liquidity management framework.

    The Liquidity Coverage Ratio (LCR)To determine LCR, the shorter-

    term measure, the bank compares its highly liquid assets (HLAs) to its total net cash outflow (TNCO) over 30 calendar days. The TNCO represents all expected cash flows from the banks outstanding balances (liabilities or off balance sheet commitments) that mature within 30 days multiplied by expected runoff/drawdown rates.

    The overall TNCO ratio is expressed as follows:

    Under the new framework, HLAs can be neither encumbered nor re-hypothecated. They are assumed to be easily converted into cash,

    THE TACTICAL LIQUIDITY CHALLENGES

    31%

    30%

    17%

    13%

    IT breakdown/information security breach

    Large-scale natural catastrophe in area of operations

    Loss of key people

    Nonphysical disruptions to owned facility8

    16

    12

    Step 3: Determine the number of common capabilities across all the segments the company serves.

    This score is mapped against EBIT margin to determine the coherence premium.

    Portfolio Coherence Score

    80604020

    2008 2009 2010 2011 2012 2013 2014 2015

    3,0302,785

    2,5082,252

    1,865

    1,463 1,493

    0

    Kraft Foods

    Unilever

    PepsiCo

    Sara Lee

    Heinz

    Kimberly-Clark

    ConAgra Foods

    GLOBAL DEVICE SALES FORECAST, 200815 [M #/YEAR]

    4

    Size of Bubble = Revenue

    Cloud Architecture

    Standard phones

    Smartphones

    Tablets

    NotebooksPC

    The particular cloud service architectuability to meet relevant security requirem

    Frequency of calculation and reporting- Reporting of LCR at least monthlyweekly or daily reports during stressed situations- Maximum permissible reporting time lag of two weeks

    Scope of application- All international banks on a consolidated basis (as set out in Part I of Basel II)- Differences in home/host liquidity requirements to be included

    Liquid asset pool composition- Currency composition of liquid asset pool needs to reflect operational footprint of bank

    Observation periods and transitional arrangements for standards- LCR and NSFR to be reported as of January 1, 2012- Revisions of LCR at the latest by mid-2013 and of the NSFR by mid-2016- LCR becomes minimum requirement in 2015, NSFR in 2018

    ts

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    3,500

    921 895

    285 271362

    458

    280

    561

    265445

    465390

    6777761,220

    1,4291,494

    1,5351,540

    1,570

    2520

    150140

    0

    138175

    18

    146210

    65

    151245

    120 190340

    156 159 158 157

    ACCUMULATED DIGITAL CONTENT PER HOUSEHOLD 40

    5

    10

    25

    15

    02020201520102006

    30

    35

    20

    Personal Data

    Home Backup

    Gaming

    Retail Home Video

    Home Entertainment

    Terabytes/Household

    Regulatory Standards Monitoring Tools Further Implementation Guidelines

    LCR by currency- Monitors potential currency mismatches

    Liquidity Coverage Ratio- Promotes short-term resilience for severe liquidity stress scenario - Requires adequate level of unencumbered liquid assets to cover net cash outflows during 30-day period

    Net Stable Funding Ratio- Enhances long-term resilience of banking institution and reduces funding mismatches- Ensures funding of long- term assets with a minimum amount of stable liabilities in relation to their liquidity risk profiles

    Available unencumbered assets- Indicates potential use of assets as collaterals during liquidity/funding stress scenarios

    Market-related data- Serves as early warning indicators for liquidity difficulties

    Contractual maturity mismatch- Identifies gaps within contractual inflows and outflows

    Concentration of funding- Identifies liquidity problems due to withdrawal of funding

    Source: Basel Committee on Banking Supervision

    Exhibit 1 BCBS Global Liquidity Management Framework

    highly liquid assets

    total net cash outflows over the next 30 calendar days

    >100%

  • 3Booz & Company

    31%

    30%

    17%

    13%

    IT breakdown/information security breach

    Large-scale natural catastrophe in area of operations

    Loss of key people

    Nonphysical disruptions to owned facility8

    16

    12

    Step 3: Determine the number of common capabilities across all the segments the company serves.

    This score is mapped against EBIT margin to determine the coherence premium.

    Portfolio Coherence Score

    80604020

    2008 2009 2010 2011 2012 2013 2014 2015

    3,0302,785

    2,5082,252

    1,865

    1,463 1,493

    0

    Kraft Foods

    Unilever

    PepsiCo

    Sara Lee

    Heinz

    Kimberly-Clark

    ConAgra Foods

    GLOBAL DEVICE SALES FORECAST, 200815 [M #/YEAR]

    4

    Size of Bubble = Revenue

    Cloud Architecture

    Standard phones

    Smartphones

    Tablets

    NotebooksPC

    The particular cloud service architectuability to meet relevant security requirem

    ts

    0

    500

    1,000

    1,500

    2,000

    2,500

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