Franchise Viability Risk – Pillar 2 Liquidity by the PRA

Franchise Viability Risk – Pillar 2 Liquidity by the PRA

By John Vergel de Dios, Director, CIT Group.

John, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

My passion is liquidity risk management. I worked at Lehman Brothers Treasury at the time of the bankruptcy and that experience is something that will stay with me forever. We all thought we were failures and would never get jobs again but the experience was an invaluable one that we’ve been able to use throughout our careers. I currently am the Head of Liquidity at CIT Bank.

What are some of the key challenges faced with franchise viability risk?

Franchise Viability Risk is not easily measured and definitely not logical. Why would a bank put itself in a worse liquidity position precisely when it is what it needs? How do you stress test it? What are the guiding principles?

At the Liquidity Risk Management Congress, you will be speaking on your insight regarding ‘Franchise Viability Risk – Pillar 2 Liquidity by the PRA”. Why is this a key concern right now? And what are the essential things to remember?

The PRA has tackled Franchise Viability Risk head on and made it transparent and a discussion point. It really does exist and the question now is how will the banks and other regulatory bodies react.

 In your opinion, how does regulation treat franchise viability now and what can we expect in the future?

In the US, the Fed speaks about this but does not explicitly require banks to stress test or at least not in detailed way. The pendulum has shifted in Washington but it will be interesting to see how the US reacts to the PRA’s move.

Could you please give a brief explanation on what franchise viability risk is?

Franchise viability risk arises when a firm takes actions, despite having no legal obligation to do so, in order to preserve its reputation, and where these actions cause unforeseen liquidity outflows. Failing to take these actions may damage the firm’s franchise, which could impede access to wholesale markets or cause significant outflows. The associated outflows are uncertain before the event, as there is no associated contractual obligation.

How do you see the liquidity risk landscape evolving over the next 6-12 months?

The focus has been shifting to intraday and operational risk. Whereas there was a move towards longer term stress testing (NSFR, TLAC) and Resolution, I see a more of a focus on intraday liquidity and operational events that can affect liquidity risk.

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