Key challenges and concerns on the horizon for liquidity risk managers

Key challenges and concerns on the horizon for liquidity risk managers

By Johan Van Duyvendijk, Americas Head of Market & Treasury Risk Control and Global Head Liquidity & Funding Treasury Risk Control, UBS.

Johan, thank you for taking the time to speak to us. Please can you tell our readers a little bit about yourself, your current role, and your main priorities at the moment?

Focus

  • Stress testing
  • Balance Sheet Optimization
  • Risk Appetite
  • Governance and Policies
  • Emerging market risks & exposure of our core book to these moves
What, for you, are the benefits of attending a conference like the Liquidity Risk Management USA 2018 Congress and what key topics are you looking forward to?

Connecting with peers to hear different approaches to the same issues. Sometimes it takes hearing someone provide a completely different interpretation to the same question to move you forward. On this front, I’m looking forward to hearing about:

  • Intraday
  • Money market reform
  • FTP
  • Modelling
You will be joining a panel discussion alongside BNP Paribas and MUFG Union Bank on Contingency Funding Plans. Without giving too much away, how do you believe FIs can best prepare for a crisis? 

First, I think it is critical for Financial Institutions to move away from the “tick-the-box” mentality of the past several years spurred to address the mounting regulations and feedback, and to focus on how to turn some of these requirements such as the CFP into core tools. For instance, can Treasurers say I actually follow this plan, or is it more fanciful. Efforts should be spent on honing the most core actions to be taken and where there are gaps, build up capabilities.

  • Can you say you could execute or have access to all contingent funding options listed.
  • “Be realistic”
You will also be joining a panel discussion alongside Bank of China USA and BNP Paribas on Interest Rate Risk. What key talking points do you believe the panellists will be addressing?

On IRR, one major topic of late is the recent Basel paper on IRRBB and enhanced disclosure standards when treatment isn’t consistent globally.

  • Also, there are probably a number of questions on the Libor-OIS volume this year and impacts to banks as we plan to move away from Libor.
  • Lastly, I think modelling and risk centralization may also be topics.
What considerations must be made when managing liquidity risk in rising rate environment

Moving out of the current low and flat rate environment will come with a number of potential pitfalls. On the surface there are the open questions around changes in deposit volumes and increased trading flows. But there are also tertiary considerations around market liquidity impacting monetization assumptions, haircuts, and credit spreads for new issuance or call features. For instance, if we think about clients buying a spread when they take out a loan, the past market cycle/rate environment has been very kind to clients with less than optimal credit. If these clients have unfunded lines or have not been maximising utilization, this may change.

What key challenges and concerns are on the horizon for liquidity risk professionals?

I think clearly regulatory pressure is a big focus and consistent with recent trade war rhetoric, the recent “roll-back” or update to Dodd-Frank was favourable to U.S. firms. So, global banks operating in the U.S. will find the market potentially more liquid intensive to operate in than U.S. peers, impacting profitability and driving the need to sell clients on a global prod. solution.

 

Beyond the regulatory/political environment, I think liquidity professionals need to think about the maturity of their stress testing capabilities. If your firm lacks refined models for risk identification, you need to be working with the business to enhance these tools. If you have just finished updating your models, you should be focussed on improving reporting to business and management to drive improved management. If your management and business understand their risk and are appropriately charged for the risk, you should be working to help drive B/S optimisation to drive down your liquidity costs. And if you believe you’re doing all of that, then you should be working with the business to refine the prod. suite to optimize your firm’s liquidity.

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