Exploring the scope of liquidity risk management and changes to markets, funding and regulation

Exploring the scope of liquidity risk management and changes to markets, funding and regulation

By Shannon Harris, Senior Research Executive, CeFPro 

Liquidity risk management continues to be a strong staple within the financial risk landscape. In the ten years since the financial crisis the role and scope of liquidity risk has definitively broadened and developed. Increasingly regulatory bodies are placing more emphasis on the importance of the function and the need to have stringent planning and procedures should another large scale event occur. As we move forward and progress in this environment, liquidity professionals are being required to have a more holistic view of multiple risk types and effectively manage unknown unknowns. Arguably the risk manager of today has a completely different set of priorities and requirements compared to the risk managers of twenty years ago. This raises the vitally important question, in this ever growing and diverse industry how do you stay on top of an already chaotic agenda?

To explore how the scope of liquidity risk management has developed, The Center for Financial Professionals conducted an extensive research study. During this project over 100 industry professionals were surveyed and interviewed over their top challenges, opportunities and concerns regarding liquidity risk management. This provided first hand insight into multiple FIs (financial Institutions) from across the UK and Europe and how they are leading the charge in managing liquidity risk. The research identified some of the key trends across the industry, below are the top three areas mentioned by multiple sources.

Very early into our research it became apparent that one of the main concerns keeping liquidity professionals awake at night was Brexit. Of course Brexit is an issue which is plaguing multiple industries, but for liquidity professionals in particular this has caused a great burden and increased workload. One of the main challenges has come from the uncertainty around Brexit, even in the final hour we are still yet to secure a deal and finalise the UKs negotiations to leave the EU. This has raised an enormous amount of questions surrounding its potential impacts on liquidity risk, changes to the business and funding. The past few weeks alone have been incredibly pressurised as firms have had to finalise their business plans post Brexit, but again this raises the conundrum of modelling and planning for the unknown. Our research highlighted how multiple liquidity teams are concerned with the macroeconomic risks including markets and cross border investing, the potential effects on cash flows and the impacts on funding. Unfortunately, there does not seem to be a light at the end of the tunnel as the political environment continues to face turbulence and create an increasing sense of uncertainty. For the time being liquidity professionals have been left with the onerous task of preparing and planning without a final outcome.

Another strong staple mentioned throughout our research was the regulatory environment and the impacts on liquidity risk management. In particular one piece of regulation stood out as a leading area of focus for this year, this was the PRA 110. With the first round of submissions swiftly approaching many commented on how there is still much to be understood about the reporting requirement. For example how to reconcile data from the old return to the new return and ensure an efficient controls and governance process. Plus many raised concerns over the use of data by the PRA, it’s unclear on how they will use the information produced from the report and who they will share the data with. With only a few months left until the submission deadline firms are now actively working on the project and aiming to achieve regulatory compliance. However it has been mentioned that more clarity from the regulators would be beneficial to ensure that the requirement is better understood and delivered correctly.

The final area which was largely mentioned during the research project was the growing focus on markets and funding. Increasingly we are seeing market issues infringing on the liquidity world and expanding the remit of the liquidity professional. In particular several participants voiced their interest in the ability to manage funding in current and future markets. With tighter market conditions, increased regulation and growing competition within the industry funding constraints are a top priority for multiple FIs. Liquidity professionals in particular have a complex task of monitoring and managing funding risk to limit the impacts on liquidity. For example regulatory items such as LCR and NSFR have the potential to impact funding, so how can firms effectively manage this risk and deliver regulatory compliance? Arguably FIs must be adaptable when faced with funding constraints and have a sustainable plan in place for steering the balance sheet in times of uncertainty. With increasing pressure in global markets, politics and regulation many suggested that funding risk will become a firm point within the liquidity planning.

In conclusion the liquidity risk landscape is experiencing a wide array of changes and an increased workload. More often we are receiving feedback on how risk management is becoming holistic as firms attempt to break down silos and create greater inter-connection between risk teams. For liquidity risk management this is no different as our research programme highlighted evidence of this transition. For example the number one biggest challenge mentioned was Brexit, this is of course a political risk and yet the potential impacts on liquidity are enormous. Plus market issues around funding constraints are also entering the liquidity risk remit. With these areas and more feeding into the liquidity space professionals also have to contend with more traditional items such as a regulation and BAU. As mentioned previously this raises questions over managing workloads and prioritizing projects to ensure all bases are covered. Looking at how the role of the liquidity function has evolved over the last decade may provide us with an indication of future trends and expectations.

To explore these areas and more The Center for Financial Professionals will be hosting the 8th Annual Liquidity Risk Management Europe, taking place on the 13th of June in London. The compact and concise one day forum will explore the evolving role and scope of liquidity risk management including changes to markets, funding and regulation. Throughout the day attendees will gain the opportunity to hear from 15+ hand-picked liquidity and treasury professionals as they explore the landscape. To find out more and view the multi-stream agenda please visit our website at www.cefpro.com/liquidity.