Key Regulatory Challenges Facing EMEA Risk Professionals: Liquidity Risk & Capital Management

Key Regulatory Challenges Facing EMEA Risk Professionals: Liquidity Risk & Capital Management

<h3>Over the past few months the Center for Financial Professionals have researched extensively with a number of banking risk and regulatory experts within the financial industry.</h3>
As the second research report in the series, this piece will focus on the key challenges risk professionals are facing over the coming year within Liquidity Risk &amp; Capital Management, such as Intraday Liquidity, TLAC and MREL and The Net Stable Funding Ratio (NSFR). The first report focused primarily on The Fundamental Review of The Trading Book (FRTB) and key areas of focus, including its overall implementation challenges, timing constraints and the move from VaR to expected shortfall. This piece, as well as the previous one, will reflect findings from our research, which will be articulated during our 5<sup>th</sup> Annual Risk EMEA: Banking Risk &amp; Regulation Summit, taking place in London on May 24<sup>th</sup> and 25<sup>th</sup> 2016. The summit brings together 50+ CROs and Heads of Department from institutions across EMEA, beginning with keynote plenary sessions and CRO panel discussions in the morning before dividing into three concurrent streams across both days: Stream One on The Fundamental Review of The Trading Book, Stream Two on Risk &amp; Regulatory Developments and Stream Three on Liquidity Risk &amp; Capital Management.

The agenda can be viewed at: <a href=””></a>

One of the main challenges within liquidity risk and capital management that came out of the research was intraday liquidity reporting requirements and particularly its implementation for better monitoring capabilities. Since the 2007/2008 financial crisis, and in particular the Lehman Brother’s crisis, intraday liquidity as a whole has been a key area of focus. Lehmann Brother’s of course went bankrupt in 2008 because it was illiquid, and it has taken a while to address one of these key elements in the crisis. Particularly interesting was the point mentioned that intraday liquidity is one of the main subject areas that many have not quite got their heads around properly. The UK and Netherlands in particular have led the way with the intraday piece, and one of the key areas of focus over the coming months is the evolvement of this intraday piece from a regulatory perspective. At the moment there are a handful of countries that have been active in legal and compliance terms, and the banks are reporting or due to report, and in other countries very little has happened. Therefore the implementation of a consistent approach across Europe was one area that came up regularly during the research. Where will it go next? Or perhaps more pertinently when will it be implemented fully across Europe?

A further key challenge that has been regularly articulated is assessing the end state capital requirements, particularly the upcoming TLAC and MREL requirements and their consequent effects and impact across the business. The theory around TLAC and MREL is quite simple, with the government wanting to avoid taxpayers acting as the lender of last resorts if it can be avoided – understandably so given the unpopularity of this with the general public. It also aims to maintain critical economic functions in the event of failure. However, what seems unclear is the overlap between the two measures, and their alignment in the UK and Europe. Whilst MREL applies to all European banks and investment firms, TLAC applies to the top global institutions (G-SIBs) and not to smaller ones. Therefore one of the major challenges is aligning the two sets of rules so there is no confusion as to which metric banks are following. In a utopian world the two sets of rules would be aligned and different banks would be operating under the same rulebook, however this is currently not the case. It also brings light to the issue that it is extremely hard for European banks to manage TLAC and MREL simultaneously.

Additionally the impact of increasing banks’ capital levels, a consequence of the TLAC and MREL metrics, poses challenging questions. Forcing banks to hold huge amounts of capital to mitigate against the effects of an economic shock puts the short-term viability of each banks survival into question. Are banks actually becoming too safe to survive? Shareholders desire high returns, and this is made far more difficult when banks are holding such large levels of capital as a buffer.

Finally, an area that was at the forefront of liquidity risk professionals’ minds, and has been for a while now, despite the relatively long distance until its planned implementation, is the Net Stable Funding Ratio (NSFR). The financial industry is certainly looking towards its implementation and putting the ground-work into finding out its potential impact on the business. However, whilst the US have decided that the NSFR will definitely come into effect, a big question mark is raised over whether this will be the case in Europe. Therefore what will be the effect on institutions with a global footprint after US adoption? It is looking increasingly likely that there is going to be a situation whereby there will be some reporting elements in markets like the US earlier than what there might be in Europe. How banks cope with this moving forward will certainly make for interesting viewing, especially coupled with the fact that liquidity risk professionals’ agreed it is unlikely that they will get an answer this year as to whether Europe will decide to implement the NSFR. Overall there is a big question mark over the NSFR with European banks. Should banks, that have limited time resources, be planning for its implementation despite the fact that it may not come into effect?

In its entirety, intraday liquidity, TLAC and MREL and the NSFR are just some of the subject areas that came out as key challenge areas within liquidity risk and capital management during our research. To hear industry discussions around these topic areas and more, join us at The Center for Financial Professionals’ 5th Annual Risk EMEA Summit, taking place in London on May 24-25th. Stream Three will be solely focused on Liquidity Risk &amp; Capital Management, with presentations and panel discussions on the challenges discussed in this report as well as many more.