Ahead of the 6th Annual Risk Americas 2017 Convention, Ed Young, Senior Director, Moody’s Analytics has provided insights in to the presentation he will delivering. Find out more about the liquidity regulations, the challenges financial risk professionals could face when when incorporating all regulations.
- Ed, we are looking forward to you joining the panel discussion at the Risk Americas 2017 Convention in New York City across May 23-24. Please tell our readers a little bit about yourself, your role and your professionals experience.
I currently work for Moody’s Analytics as a subject matter expert focusing on balance sheet management, capital planning, stress testing, credit risk management, and ALLL processes. In this capacity have the opportunity to work with a diverse group of clients to help them develop stress testing solutions that meet regulatory requirements as well as their business needs.
Prior to joining Moody’s Analytics, I worked for ten years at the Federal Reserve. During my time at the Fed I was able to contribute to many System level initiatives related to capital planning, credit risk, liquidity risk, interest rate risk, and model risk management. Additionally, I was involved with the Fed’s supervision of capital planning initiatives including leading horizontal evaluation teams focused on Foundational Risk Management, Capital Adequacy Assessment, Capital Policy, Model Risk Management, and Governance. Earlier in my career I worked in the Treasury Division of two regional banks focused on interest rate risk modeling and economic capital.
- You will be discussing ways of incorporating liquidity risk regulatory requirements into one unified process. What are the key topics and highlights which will be discussed during the panel?
“Unifying” liquidity risk regulatory requirements can mean many things to many different organizations. However, the target state for liquidity risk management is to have a comprehensive series of models and processes that work together to identify, manage, and measure risk. At large banks, this may mean linking processes between liquidity risk management and Funds Transfer Pricing to ensure all liquidity and funding risk is captured in the transfer pricing process. Additionally, in means integrating liquidity stress testing process with regulatory reporting requirements for items like the Liquidity Coverage Ratio (and the pending Net Stable Funding Ratio). Eventually, it will lead to a truly integrated forecasting process that can handle processing liquidity stress scenarios along with capital stress scenarios in a consolidated ecosystem.
- Banks currently must implement and contend with LCR, NSFR, EPS and CLAR liquidity regulations. Can you tell us the challenges which could be faced when unifying the process to incorporate them all and how can banks begin to align these?
Banks have definitely had a challenge facing the alphabet soup of various ratios and thresholds during the recent years. Similarly to the challenges in the capital stress testing world, data integrity, availability, and consistency were initial challenges for banks coping with the changes. However, the focus has now shifted to more qualitative elements of the process. Risk identification, stress scenario development and analysis, and internal controls are additional challenges banks are facing today. Banks that have been able to identify and implement framework that can not only handle the regulatory reporting requirements, but also the risk management expectations in a comprehensive manner have been the most successful in meeting all supervisory expectations.
- What benefits are there to collating results to make strategic and informed decisions?
There are immense benefits to developing comprehensive liquidity risk management processes that collate results in a timely manner. Large banks have been forced to meet minimum standards for liquidity reporting (LCR and modified LCR). However, projects that were designed to align with broader liquidity stress testing processes enable a firm to more quickly adjust course in times of stress.
- What upcoming challenges do you foresee for liquidity risk professionals over the next six to 12 months?
In the aftermath of the financial crisis banks and regulators have implemented new approaches and tools mitigate liquidity risk. However, uncertainty looms in many areas around the globe. From geopolitical concerns to the continued low interest rate environment, a wide range of events could quickly alter the dynamics of the currently calm liquidity and funding markets. Will these new untested tools work? Will historical deposit behavior relationships hold in a rising rate environment? Will disruptive technologies alter market dynamics? These are the types of questions that liquidity risk professionals will be working to answer over the next six to twelve months.