By Joe Peedikayil, SVP, Liquidity/Credit/Capital-Qualitative Model Validation, Wells Fargo
What, for you, are the benefits of attending a conference like the Liquidity Risk Management Congress and what have attendees learnt from your session?
There are many benefits in attending the Liquidity Risk Management Congress. The comprehensive agenda touches on some of the most important topics in Liquidity risk management today. Topics ranging from recent regulatory changes in Liquidity Risk Management to Liquidity Stress Testing, NSFR and Modelling assumptions. Furthermore, given the depth and breadth of the speakers and SMEs that attended, it was beneficial for any professional that manages Liquidity Risk for their respective firms to interact and share thoughts and perspectives on the Liquidity Risk in a collaborative forum.
What are some of the key challenges surrounding qualitative assumptions?
Assumptions in general are difficult to develop, to justify and to adequately support at times but that does not mean assumption owners will get a pass from, regulators, model validators or auditors. Assumptions by definition is “something that is accepted as true or as certain to happen, without proof.” The key challenges facing qualitative assumptions are; properly documenting the assumption in a model development document including describing the assumption, why the assumption is appropriate, what the assumption is based on (historic observation, empirical evidence, management judgement) and lastly what happens if the assumption does not hold true (conduct sensitivity analysis). Liquidity risk management is based on several key assumptions (deposit outflow behaviour, prepayment behaviour, idiosyncratic risk add on etc.).It is imperative that stakeholders go through the exercise of properly describing and supporting assumptions as through that exercise one may uncover some flaws in critical assumptions on related products or balance sheet items that do not align or contradict one another.
What advice would you give to industry professionals when supporting assumptions?
When supporting assumptions it is important to properly describe the assumption, why the assumption is fit for purpose or appropriate for a given product or modelling technique and where the assumption is derived. After the assumption is thoroughly described we must support the assumption thoroughly, one must support it through empirical evidence or data, industry practice or accepted guidance (regulatory or accounting) lastly management judgement. Management judgement must explain the basis of the assumption, the rationale why the assumption would hold true i.e. outline the thought process and data points leveraged to support the assumption and lastly what type of governance and oversight exists over assumption management, i.e. the adequacy of assumptions testing, review and challenge.