By Andrew Fellingham, Group Head, Director Market and Liquidity Risk Management Americas, SMBC.
Andrew, can you tell the Center for Financial Professionals about yourself and your experience in the industry?
I have worked in treasury, portfolio management, and risk primarily at foreign banking organizations (FBOs) in NY for over 20 years. My experience runs the asset/liability gamut from leading funding desks to managing total return portfolios; and the banking lifecycle from risk origination to workouts. Currently I oversee market and liquidity risk for SMBC Americas Division.
What are the main challenges with EPS post implementation and how can institutions identify gaps?
Speaking specifically about FBOs in the U.S., the process of establishing new local committee structures and reporting lines alone was a heavy lift. At the same time many had to add new risk processes, reporting functions, and head count to shoulder the workload. I think there are still some growing pains associated with getting accustomed to the new reality. FBOs need to thread the needle of operating within a larger global network while simultaneously satisfying local regulators. I think the institutions that have adapted best are those that have turned to local experts to help identify gaps and solve implementation problems.
A point for discussion within your presentation is liquidity stress test assumptions and documentation, why is this an important consideration under EPS?
Liquidity Stress Tests (LST) are predictive tools to help determine how long a bank can survive a combined idiosyncratic and market stress event. Unlike CCAR the EPS requirements for 14 day (bank branch) and 30 day (holding company) stress scenarios are not explicitly given to banks. While supervisory guidance has been given and there are certain required elements that have been defined, much of the scenario definition has been left to individual firms. The results are important, but regulators also want to understand how a scenario was constructed and what assumptions underpin the testing. That can only be conveyed via clear scenario creation and assumption documentation.
Can you provide a brief explanation of the impact EPS implementation has had?
Historically many FBOs had local policy and procedure documentation that was adapted from head office. The new EPS requirements changed the nature of this relationship. There are now local teams across departments focused on satisfying local regulatory requirements. Part of the challenge is to create and update locally crafted processes and documentation that also fits within the risk framework of the larger global organization.
Can you identify how there have been gaps in EPS implementation?
Post implementation challenges come in a few forms: structural, personnel, and systems. For the most part getting the structure in place was only the first step in ensuring that an organization is able to efficiently manage within the new framework. For FBOs cultural flexibility and decentralized decision making are key to overcoming gaps. Ensuring the right people are in the right seats and that there is available IT budget to address the new regulatory reports are issues every firm faces.
How do you see the role of Liquidity professional evolving over the next 6-12 months, especially with the regulatory trends changing?
There is a great deal of uncertainty around regulatory changes/trends, and I am unqualified to handicap outcomes. Currently we are complying with the regulatory requirements as they exist, or are scheduled to be implemented. I think liquidity risk managers need to ensure that they are not working in a silo only focused on things like liquidity stress testing. I believe that EPS requirements were put in place to ensure that liquidity is managed holistically from funding desk and Funds Transfer Pricing activity to CCAR and Resolution planning. That has to be done by rank and file bank employees working together across departments, not just at the board or CRO level.