Liquidity limits, governance and audit

Liquidity limits, governance and audit

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By Erjun Chen, Director, Internal Audit, CIT Bank.

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

Currently, I am working at CIT as an audit director covering liquidity, interest rate risk management and other Treasury functions.  I also have been participating in auditing CCAR/DFAST audit. Prior joining CIT, I worked at Ernest & Young and KPMG as a Senior Audit Manager and an Audit Manager, respectively, focusing on the financial statements audits in the banking industry. Prior to work for “Big Four’ accounting firms, I worked as a foreign exchange trader at one of Chinese Banks.

What are some of the key issues around governance liquidity that professionals may face?

Governance liquidity needs to keep up with the increase of regulatory guidance and expectations. The bar has been raised therefore meeting the minimum requirements is no longer acceptable in managing a company’s liquidity. Instead, applying best practice and evidencing effective reviews and challenges are essential to demonstrate robust and rigorous liquidity governance.

At the Liquidity Risk Management Congress, you will be speaking on your insight regarding ‘Liquidity limits, governance and audit”. Why is this a key concern right now? And what are the essential things to remember?

Proper establishment of liquidity limits and effective governance over these limits are an integrated part of managing liquidity risk.  Developing a company’s limits and limits structure are complex and it involves in many aspects such as a company’s risk appetite statement, quantifying the risk tolerance via models or expert judgements, monitoring, periodically revisiting limits as well as reporting of usage of these limits. Because the liquidity limits serve an indication of a company’s liquidity and liquidity risks, it is essential that these limits are properly developed, used and governed.  When auditing liquidity limits, the audit would cover all limits processes to ensure liquidity limits are consistent with the risk tolerance stated in the risk appetite statement; historical data, models or expert judgment are appropriately documented to support the current limits. The audit would cover the second line, senior management committees and Board of Directors ‘reviews and challenges to ensure it is effective. Lastly, the audit should ensure that management has the process of revisiting limits periodically to ensure these limits are still valid with business changes or regulatory landscape changes.

In your opinion, how has the role of audit changes and can you give an example of this?

With increasing mandates from regulators, Audit Committee and senior management on the audit, while performing the traditional audits, the Internal Audit Department should also perform a real time consulting services in order to provide more value added audits to stakeholders on management’s key initiatives.  In order to provide such services, the Internal Audit Department should be equipped with data analytics skills and have a broader view of interactions between liquidity risks and other risks such capital adequacy, market risk, funding risk, etc. For example, if a company is implementing processes and controls to be in compliance with new regulatory requirements, the Internal Audit Department should have a plan working with management reviewing processes and controls and providing feedback before implementing them. In my view, this type of “forward looking” projects would generate more value-added results to stakeholders.

What is the challenges facing Internal Audit Department

While there are still needs for general auditors, auditors with special expertise become critical when covering areas like liquidity. A check-box audit is no longer effective given the increase of regulatory requirement and expectations on audit.  Therefore, the biggest challenge facing Internal Audit Department, in my views, is to retain auditors with such special expertise as understanding liquidity regulatory requirements, data analytics and be able to connect dots among different but related risks.

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

With the “Economic Growth, Regulatory Relief, and Consumer Protection Act” being signed into law, it expects that it would relieve certain regulatory burdens for smaller and certain regional banking organizations such as on the capital stress testing. However, the regulatory expectation on a company’s liquidity management would continuously stay elevated. As mentioned earlier, meeting the minimum regulatory requirements is not an appropriate option anymore, especially in the environment where interest rates have started to increase since the financial crisis.

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