By Yuhong Liu, Director, BNP Paribas
**Disclaimer: All of the views, opinions and interpretations presented herein are solely those of the speaker and should not in any way be considered to represent those of BNP Paribas.**
What, for you, are the benefits of attending a conference like the Liquidity Risk Management Congress and what can attendees expect to learn from your session?
The conference provides a good opportunity for both peers and subject matter experts to share information and best practices. Risk management practices vary significantly between financial institutions with different holdings and activities, therefore one institution’s risk practices might be an eye-opening discovery for another institution. I am particularly interested in learning how other peers approach IRRBB, to what level peers model NII and EVE, and how they assess the model performance.
Such conferences are an excellent opportunity for networking; attendees benefit from learning about best practices from industry experts, with the ability to ask particular questions regarding industry opinion and benchmarks. Especially interesting to me is learning about the continuous low interest rate environment and IBOR reform, what should we expect and how should we adapt the changes.
In your opinion, what are the main processes and tools to effectively forecast interest rate risk?
Comprehensive policies and procedures governing all aspect of interest rate risk (IRR) should be required for an institution’s effective IRR management. The details could include: methodologies that regularly and systematically measure and monitor risk exposures under both business as usual and stress testing scenarios; a validation process to challenge key methodology assumptions; a risk identification process to ensure sensitive risk types with material exposures are captured in the risk inventory and continuously monitored; as well as a proper risk mitigating framework with appropriate limits.
In addition, senior management, working closely with the subject matter experts, should be able to effectively foresee the institution’s interest rate risk. Senior management involves the institution’s strategic planning and knows the institution’s mid-to-long term balance sheet growth and hedging strategies under different macro-economic environments.
Without giving too much away, could you provide insights on the lessons learned from past scenarios?
I am not entirely sure what ‘past scenarios’ means here, but the scenarios published by BIS in 2016 do provide insight on how sensitive the institution’s positions are on rates hikes. The U. S. has been in a low interest rate environment for a long time now and may continue to stay in the low rate environment as globalization adds more uncertainty to the monetary cycle and term structures.
In your opinion, how can institutions sufficiently plan for potential rate hikes and future economic recession?
The current stress testing framework, mainly the U. S. CCAR exercise has prepared participating institutions with a countercyclical buffer for future economic recessions. Similarly, sensitivity and scenario analysis under IRRBB framework, while following an appropriate risk limit framework based on an institution’s risk appetite, should be an efficient way for institutions’ IRR management. In this way, institutions should be prepared for potential rate hikes and future economy recession.
How do you see the liquidity risk landscape changing in the next 6-12 months?
Following Regulations YY and WW, the liquidity risk landscape has evolved to cover both business as usual risk management and stress testing contexts. The complete framework includes Cash Flow Forecasting (CFF), Contingency Funding Plan (CFP), Liquidity Stress Testing (LST) and Liquidity Coverage Ratio (LCR), etc. At the same time, most institutions have undergone regulatory reviews and have completed and put in place the related liquidity risk management policies and procedures. However, there may be some adjustments in the framework due to the recently proposed tailored EPS rule and the ongoing interest rate reform expected in the next six to twelve months.