The impacts of a rising rate environment

The impacts of a rising rate environment

By Charlie Peng, SVP and Head of Market Risk Management Department, Bank of China USA.

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

 I started my career from a “Big Four” consultant and then went from client services to client side, a Wall Street bank. I’m always keen to learn and expand my exposure, so I had opportunities to rotate several positions in the bank and gained experience from back office to front office. I’m currently working in a large foreign bank in US and manage the market and liquidity risk oversight team. Liquidity has always been my focus since I went through 2008 financial crisis and witnessed some large banks fell down mainly from liquidity crunches.

What are some of the challenges when managing liquidity in a rising rate environment?

The biggest challenge is the rising cost for liquidity with more expensive funding sources. The supply of the funds is also diminishing with Fed balance sheet shrinking and more money are locked in. Banks will face more competition for diminishing supply especially when clients have high expectation of interest rate rising.

What, for you, are the benefits of attending a conference like the “Liquidity Risk Management USA” and what can attendees expect to learn from your session?

The biggest benefit is I can learn from peer banks’ best practice and know the peers among the same area. It’s a small world and I sometimes bump into some ex-colleagues with pleasant surprises. For the attendees, the session can offer some thoughts, ideas and practices to the same challenges they are facing.

 In your opinion, what is the best approach when producing sustainable internal structures and frameworks?

The best approach is customized vendor solution by leveraging vendor system but tailor-made to fit with the bank’s business model and process. Knowledge transfer and internalization of the structure and frameworks are also critical for sustainability. The structure and framework must be well integrated with business as usual practices.

Could you please give an insight on how quickly the market/rates change and any first-hand experience you have with this?

At the beginning of this year, Fed project 3 interest-rate hikes this year and now after 6 months, it’s changed to 4 hikes this year. With the dynamics and uncertainty in the market and US economy, the market/rates can be quickly changed. We closely monitor US treasury yields, US Libor rates.

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

Interest rates continue to rise and central bank’s balance sheet continues to shrink, the excess liquidity is drying up. Funding will have less supply and more expensive. Liquidity risk management will not only be a regulatory requirement, but also a business critical function for bank’s survival and sustainability.

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