Microgen Basel III Liquidity Risk

© Microgen plc 2013 Page 1

Liquidity is the new Capital


Agenda

• The goals of Basel III

• Why is Basel III such a challenge?

• Historical positioning for Liquidity Reporting

• Why Basel III is a catalyst for change

• How to make Liquidity Reporting a valuable Business Asset

• What are the success factors?

• How do you move forward?


Why is Basel III such a challenge?

• Basel III sets out new requirements for

Liquidity Processes and Management:

– Target Ratio’s will require significant

increases in holdings of Liquid Assets.

The expectation is that this will

negatively impact RoE.

– Individual Countries will overlay

additional requirements resulting in

locally increased target ratio’s

exacerbating pressure on RoE.

• Early on in the transition process

there is a need for a wealth of

information analysed at a highly

granular level, typically at the level

of the trade.

• Such analysis must take place in an

environment where:

– Demand for quality liquid assets is increasing

hence the price of liquidity is increasing.

– The cost of certain trading activities

(such as derivatives trading) is increasing

dramatically.

– As the price of liquidity increases, the

pressure on RoE increases.

– Capital requirements are increasing as a

result of the EU’s Capital Requirements

Directive.

You need detailed information

for analysis at your fingertips.



• The timetable for compliance is tight:

– The transition period started 1st January 2013. Minimum

capital requirements are now in place.

– Target Ratio’s are to be met on a stepped basis

up to 2019.

– Pressure from Ratings Agencies and Markets is

expected to demand compliance long before 2019.

• The rules are continuing to evolve:

– Changes to the LCR were agreed in January 2013.

– During 2013 additional aspects of the LCR will

be scrutinised and modifications to the NSFR

will be considered.



– At both the Corporate, Regional and Business Line level every Balance Sheet item must be understood as must it’s demand for, and relative cost of, Liquidity.

– The Balance Sheet contractual maturity mismatch over the short, medium and long term time horizon must be clear, as must any imbalance between the timings of cash inflows and outflows.

– The cost of maintaining positions with lower-rated counterparties will increase therefore all opportunities for collateralisation and netting must be fully understood and exploited.

– The location and nature of any unencumbered assets must be known and opportunities for utilisation be clearly understood.

– All possible funding sources coupled with their associated cost must be clear.

– Developments in the wider market must be understood and taken into account.

• To survive Basel III organisational decision makers

must have a breadth of information at their fingertips

early in the transition process:

Market

Developments

Maturity

Mismatches

Funding

Sources &

Funding Costs

Collateralisation

& Netting

Opportunities

Unencumbered

Assets

B/S

Substantiation

Information


Moving towards a ‘Business Asset’

• Turning an ‘Overhead’ into a ‘Business Asset’

– Liquidity Management must now rank equally in

importance alongside:

• Risk Management

• Capital Planning

• Business Strategy

• Balance Sheet Management

– Only when Liquidity Management is a component part

of the day-to-day management of an organisation can

there be full transparency as to the impact Liquidity

can have on a business.

With Liquidity Management being a core

component of day-to-day business

management you have also gained a

very powerful business asset.

Only then can a business start

to meet the requirements of

the regulators.


Creating the ‘Business Asset’

• What are the success factors?

– Information must be timely:

• Useful in the ‘front-line’.

• Contribute to forward-looking decisions.

– Deployment of Liquid Funds must be clearly identifiable – it is a scarce resource:

• Are all liquid assets deployed efficiently?

• The cost of NOT utilising excess liquidity should be clear.

• Liquidity should be ‘priced’ when decisions are made, not after the fact.

– Are new sources of Liquidity available, and at what price?

• New business opportunities could be progressed if Liquidity is available.

– Liquidity concentrations across different business should be apparent:

• Scenario modelling then allows management of these concentrations.

– Changes and flexes in the Balance Sheet and its impact on Liquidity should be

easily understood allowing effective Balance Sheet management over time.


Case Study: Business Challenges

Group Treasury were facing increasing demands

from external and internal stakeholders:

• Financial Markets / Investors:

– Returns expected with low tolerance for volatility

– Continuous product and market development

• Financial Regulation / Ratings Agencies:

– Regulations and ratings agencies were more demanding

– Focus on Capital and Liquidity Requirements

– Increasing reporting requirements and visibility

• Internal Drivers:

– Grow the business in the ‘Right Areas’

– Support the prioritisation of resources

– Focus on Liquidity, Capital and Balance Sheet Management

– Optimise Costs – the ‘New Normal’


Case Study: Current Infrastructure

• Tasks structured around systems not

processes – sub optimal

• Data / Reporting:

– 35% - 90% of time / effort – data collation

– Reported data not fully reconciled

– Report completeness / accuracy ~ 85%

– Duplication of effort across different reports

– Data errors not fixed at source – high levels

of repeated manual adjustments

– Lack of audit trail / transparency

• Infrastructure: – Major cause of project failure

– Reliance on project teams for reporting – high

cost and inefficient

– Forecasting and analytics capabilities

are limited

Currently struggling to meet current

regulatory requirements, future

requirements will increase.


Case Study: The Catalyst for Change

Basel III was viewed as a

catalyst for change.

Basel III moved budget spend

associated with the ‘Group

Treasury Vision’ Project from

Discretionary to Mandatory.

Group Treasury were able to

prove that they couldn’t meet new

regulatory requirements given

their existing infrastructure and

associated business processes.


Case Study: Infrastructure Requirements

Detailed analysis was performed to set

out the Infrastructure requirements to

support the Group Treasury Vision.

• Budget approval was granted for a Treasury

Centralised Database designed to enable

the following:

– Simplified IT infrastructure to improve:

• Operational performance and support

• Time to market for new products / reports

• On boarding of new data feeds or systems

• Controls for sharing data and reports

• Automation of current manual processes

– Data / Reporting:

• Reconcile Data – have confidence in the numbers

• Reduce duplicated effort

• Reduce manual adjustments – fix at source

• Increase transparency

• Increase ability to analyse and advise

– Time and tools to model and understand

the drivers of cost of funding and liquidity

across the bank

GL

Feeds

GL

Data Source

Providers

Group Treasury

Single

data

set

Markets

Retail

Banking

External

Data

Referenc

e Data

Group

Investment &

Execution

Group Liquidity

Risk

Management

Group Capital

Management

Group Asset &

liability

Management

Group Funding

Financial Risk

and Control

Data Governance & Operating Model

GL

Feeds

GL

Data Source

Providers

Group Treasury

Single

data

set

Markets

Retail

Banking

External

Data

Referenc

e Data

Group

Investment &

Execution

Group Liquidity

Risk

Management

Group Capital

Management

Group Asset &

liability

Management

Group Funding

Financial Risk

and Control

Data Governance & Operating Model

Single

point for

all data

sourcin

g

Single

version

of the

truth

Reconciled

data with GL

Joined up

Infrastructure

and data

governance


Case Study: Evaluation Criteria

Corporate policy is to buy ‘Off the Shelf’ when is it not

possible to leverage existing solutions.

All options were therefore considered with the objective

of minimising delivery risk and accelerating the time

to market.

Evaluation Criteria:

• Solution Flexibility

• Solution Functionality

• Operational Risk

• Implementation Risk

Off the Shelf

Configurable

Liquidity Risk

Management

Solution

Data

Warehouse

led Solution

with Integrated

Finance and

Risk Data

Model

Custom

Database

Do

Nothing

• Total Cost of Ownership

• Implementation Time

• In-house skills/resources required


Case Study: Infrastructure Choices

During the analysis phase a range of both Tactical and Strategic

options for the delivery of the Treasury Centralised Database

were considered:

✓

✗

✗

✗

✗

• Buy an ‘Off the Shelf’ Treasury Solution: a configurable application

designed to deliver a high proportion of the requirements ‘out of the box’.

• Include the Treasury Centralised Database requirements within an

existing Data Warehouse Solution.

• Develop a custom Treasury Centralised Database Solution.

• Develop a Treasury Centralised Database using their existing Liquidity

Reporting Database.

• As-is with forced technical upgrades to meet minimum technical

requirements. This option excluded any new business requirement.


Contact us for more information on

Microgen’s Basel III Liquidity Risk

Monitoring Product

Product Brochure

[email protected]

UK: + 44 20 7496 8100

US: + 1 617 273 8289

www.microgen.com/liquidity

http://www.microgen.com/uk-en/sites/default/files/microgen_liquidity_flyer.pdf







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Microgen Basel III Liquidity Risk