Reviewing regulatory requirements to better understand the Liquidity Risk landscape for management and compliance

Reviewing regulatory requirements to better understand the Liquidity Risk landscape for management and compliance

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.

However ambiguity can also result in infrastructure overhauls and extensive draining of resources towards regulatory compliance, only to fall at the final hurdle, forcing companies to take a better safe than sorry stance and interpret the rules as they are stated. Over the last few years, institutions have seen many large overhauls in the liquidity space with areas like LCR, NSFR, ILAAP, Intraday all coming into play over the last few and upcoming few years, interpreting these to ensure they are aligned internally and all work adequately together is a challenge faced by all institutions during our research. The question remains how organizations can build out systems to support these regulations, whilst ensuring the flexibility to make unexpected changes and incorporate new regulation into a firm wide risk management programme.

An area falling under the regulatory changes bracket is that of intraday liquidity and the necessary reporting requirements. Many internal systems and infrastructures were not originally set up to cope with and facilitate the level or reporting required for intraday liquidity, therefore the efforts for most financial institutions have been a huge undertaking, resulting in huge drains on resources. A second area under the systems for intraday liquidity reporting is the data available in the current systems, the granularity of data required for intraday reporting is far more intricate and a vast amount to report current positions at any given point. Institutions are now moving towards understanding the requirements better and therefore beginning to operationalize the process and build it into a permanent system within the reporting infrastructure, managing this on a daily basis continues to be a challenge, with limited resources, limited data sets for analysis and subject matter experts to constantly collect, collate and report the necessary data. To accommodate new and evolving regulations, beyond intraday, there has been a clear focus on gaining a better understanding and requirement for flexibility in systems and frameworks to be put in place. The levels of granularity, accuracy and the requirement of maintaining data ahead of time is a crucial challenge.

These are just a few of the topics highlighted throughout our extensive research into Liquidity risk management across Europe, the topics listed above and many more will be addressed at Liquidity Risk Management Forum, which will return for its 5th annual appearance, bringing together senior liquidity Risk, Treasury and ALM professionals. The forum is leading the way to discuss the key challenges for the coming year and also addressing the lessons that have been learnt; particularly post regulatory implementation.

The Center For Financial professionals line up of industry thought leaders will provide knowledge and insight on key themes affecting Liquidity Risk. To be part of our highly interactive presentations and discussions, join us at The Center For Financial Professionals, 5th Annual Liquidity Risk Forum, taking place in London on 15th November. For further information please follow the link: