Liquidity Risk Management is an area of focus for financial institutions and regulators globally, with the potential systemic impact of being unable to obtain the necessary liquidity to cover financial obligations, regulators are cracking down to safeguard the industry and reduce the systemic risk of large organisations failing to meet obligations.
The Center for Financial professionals carried out extensive primary research to gain insight from leading liquidity risk professionals across Europe. Some of the key themes will be addressed in this summary piece, with the full findings released and discussed at the 5th Annual Liquidity Risk Forum. Just some of the challenges to be outlined in this piece include: an overview of the liquidity landscape, intraday liquidity reporting and overcoming data demands across regulatory programs and maintaining sufficient levels for reporting.
Liquidity and the associated risks remain a top priority for all financial institutions across the industry, with a range of regulatory changes and uncertainty around the future of the liquidity landscape, is there a light at the end of the tunnel for liquidity risk managers, and an idea of the broader liquidity landscape? Many of the regulatory changes within liquidity risk have been released by the regulators and interpreted by the financial institutions and implemented or infrastructure changes have commenced. The focus is now shifting to the bigger picture and reviewing how these regulations work alongside each other, with a phase in period for each regulation, it remains unclear the overlaps that will occur and how institutions can alleviate this duplication of effort for a more seamless approach. As the industry moves closer to implementation and finalization of standards, it remains to be seen whether there is a bigger picture to be seen, whether regulators are taking a case by case stance or working towards a bigger goal for the liquidity landscape. Financial institutions must look to improve or develop their current infrastructure to support the regulatory demands, adaptability being key to accommodating the changes and ensuring not just regulatory compliance, but a good risk management practice that incorporates adequate risk controls, robust frameworks, regulatory scrutiny and supports strategic planning and management.
As is the case across many regulatory changes, there is an element of interpretation across the industry and individual organizations when implementing regulations. Many changes look to bring uniformity across the industry to create a level playing field and ensure comparability across institutions. However the level of interpretation across institutions and various departments does not always create the desired comparability and uniformity. With the language used in consultative papers often very ambiguous and final standards often also similar, it is down to institutions to be subjective around their interpretation, which has its benefits and its pitfalls. Allowing for individual, subjectivity in interpretation of a standard, allows an institution to tailor the changes to their organisation, with smaller institutions often dubious that the rules are created with large banks in mind, it gives the opportunity to customize to a certain degree.