1 / 39

Liquidity Risk – Regulatory Framework

Liquidity Risk – Regulatory Framework. London, 8 th August 2006 Vincent Baritsch Wholesale and Prudential Policy Division UK Financial Services Authority. Liquidity Risk – Regulatory Issues. Overview. Current FSA regimes Qualitative Quantitative Problems FSA ideas for change and DP24

vilmos
Download Presentation

Liquidity Risk – Regulatory Framework

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Liquidity Risk – Regulatory Framework London, 8th August 2006 Vincent Baritsch Wholesale and Prudential Policy Division UK Financial Services Authority

  2. Liquidity Risk – Regulatory Issues Overview • Current FSA regimes • Qualitative • Quantitative • Problems • FSA ideas for change and DP24 • International developments • Challenges

  3. Liquidity Risk – Regulatory Issues Stress testing and contingency funding plans – SYSC 11 applying to all CRD firms • New requirements in force since end-2004, amended for CRD • Apply to deposit-takers, insurers, all BIPRU investment firms • A firm must carry out stress tests and scenario analyses for liquidity risk … • … and must estimate the resources it would need in each of the scenarios considered • Depends on “nature, scale, and complexity” of a firm’s business • Considerations for branches and subsidiaries

  4. Liquidity Risk – Regulatory Issues GENPRU 1.2 – Adequacy of financial resources • Applies to all BIPRU firms • Maintain adequate liquidity resources to cover all liabilities, including contingent and prospective liabilities • Realistic valuation methodologies • Stress testing and CPF’s • Manage major sources or risks, including liquidity risk • Document risk assessments

  5. Liquidity Risk – Regulatory Issues Deposit-takers • Deposit-takers must maintain a policy statement on liquidity management • Should cover both normal and crisis management • Should include details of the bank’s contingency funding plan

  6. Liquidity Risk – Regulatory Issues Existing FSA quantitative banking regimes • ‘Sterling stock’ regime for major retail banks (2) Maturity mismatch approach for other banks

  7. Liquidity Risk – Regulatory Issues Existing regimes: sterling stock • Five working day survival period • Assumes no renewal of wholesale funding, outflow of 5% of retail deposits • Covers sterling cash flows only • Net outflows must be covered 100% by a stock of high-quality liquid assets • defined as those eligible in Bank of England Open Market Operations • Some allowance for holdings of other banks’ CDs • Additionally, agreed floor for the stock (£ amount, not ratio) – ‘belt and braces’ • Consolidated reporting

  8. Liquidity Risk – Regulatory Issues Existing regimes: mismatch (1) • Applies to UK banks (solo) including all overseas branches, and to UK branches of overseas banks • Contractual cash flows (worst case) allocated to maturity bands • Mismatch ratio for each time band calculated as net cash flow / total deposits • Individual limits set on cumulative mismatch ratios out to 1 week and 1 month • Quarterly reporting but daily requirement – breaches to be notified to FSA immediately

  9. Liquidity Risk – Regulatory Issues Existing regimes: mismatch (2) • Marketable assets assumed to deliver cash inflows on sale/ repo rather than maturity • Normally within the 1 week time band • Minimum criteria include – • Prices regularly quoted • Asset regularly traded • Can be sold or repo’d on an exchange or in a deep and liquid market for cash • Subject to a range of discounts according to volatility, eg • 0 – 10% for Zone A central government debt • 5 – 15% for ‘qualifying’ Zone A non-government debt • 20% for equities listed on a recognised exchange • 20 – 50% for certain Zone B securities

  10. Liquidity Risk – Regulatory Issues Existing regimes: mismatch (3) • FSA can agree ‘behavioural adjustments’ on some cash flows. Eg - • reduces outflow on undrawn credit card commitments from 100% to 75% • inflow allowed of 90% of committed lines received • ‘Global liquidity concessions’ possible for overseas branches • FSA to be satisfied with home country liquidity supervision • Branch integrated with head office • Home supervisor happy with the arrangement

  11. Liquidity Risk – Regulatory Issues Investment Firms regimes • Illiquid assets either deducted from capital, or 8% charge (on top of market risk charges) + liquidity adjustments • Aim is to promote orderly winding down in a crisis by ensuring sufficient liquid resources are available

  12. Liquidity Risk – Regulatory Issues Problems with the Sterling Stock regime • Focus is on the immediate, first week period; • No general requirements in relation to the non-sterling parts of firms' business; • Relatively limited set of assets qualifying as part of the stock and has some undesirable behavioural and market-structural consequences; and • Double duty of regulatory stock of sterling liquid assets with intra-day collateral needs for payment systems

  13. Liquidity Risk – Regulatory Issues Problems with the Mismatch regime • Increasingly divergent from banks LRM; • Discount factors and hair cuts applied to instruments are based on limited criteria; • Is not tailored for different kinds of firm; and • Marketable assets allowed are based on potentially outdated material.

  14. Liquidity Risk – Regulatory Issues Problems with investment firms regime • Illiquid asset regime / liquidity adjustment relatively penal and not risk sensitive • For many firms changes resulting from CRD may mean no effective liquidity buffers, except those from P2 • Unlevel playing field

  15. Liquidity Risk – Regulatory Issues FSA ideas for change • FSA Discussion Paper 24 – October 2003 • DP, ie ‘greener’ than a Consultation Paper • To be part of FSA’s integrated prudential sourcebook • FSA as the single regulator • All firms with significant liquidity risk – and all areas of business giving rise to risk • Shortcomings in predecessor regimes

  16. Liquidity Risk – Regulatory Issues DP24 – main principles • Maturity ladder with stressed cash flows • Stress factors to approximate stress behaviour • Limits on 1 week and 1 month gaps • Normally solo, but recognition of groups

  17. Liquidity Risk – Regulatory Issues DP24 – main principles (2) • Scope for some firms to use own approaches • Embedded “Core Marketable Assets Requirement” • No more “double duty”

  18. Liquidity Risk – Regulatory Issues DP24 Feedback Generally agreed with – • Need for reform • Focus on cash flow mismatch • Integrated approach • Scope for group treatment

  19. Liquidity Risk – Regulatory Issues DP24 Feedback (2) Concerns – • Attempting a standard stress • Including stress in quantitative approach • Level of detail, degree of prescription • Too little room for firms’ own approaches

  20. Liquidity Risk – Regulatory Issues DP24 Feedback (3) More concerns – • Insufficient allowance for group-wide management of liquidity risk • Firms don’t like solo requirements within ILGs • Does not fit well with central liquidity management – “trapped pockets of liquidity” • Problem of standardising intra-group flows

  21. Liquidity Risk – Regulatory Issues DP24 Feedback (4) Yet more concerns - • Requirement for core marketable assets • Impact of ending double duty • Investment firms unhappy – • too banking-oriented • and not flexible enough

  22. Liquidity Risk – Regulatory Issues DP24 Feedback (5) Other concerns – • Treatment of marketable assets • “Continuation of business” • Some don’t like whole concept • Many concerns about debt buyback assumptions • Should not assume new wholesale placements • Concerns about currency treatment

  23. Liquidity Risk – Regulatory Issues After DP24 – where next? • Wait and see what international work brings • Why do we need a Pillar 1 approach? • Pillar 2 and/ or Pillar 3?

  24. Liquidity Risk – Regulatory Issues Bank of England reform of its operations in the Money Market

  25. Liquidity Risk – Regulatory Issues International context • Qualitative • Basel Committee paper on sound practices for managing liquidity in banks (2000) • IOSCO - Sound Practices for the Management of Liquidity Risk at Securities Firms 2002- • IAIS – Guidance Paper on Investment Risk Management, 2004 • CRD (Capital Requirements Directive) Annex V to be implemented across the EEA • Quantitative – no agreed international standard

  26. Liquidity Risk – Regulatory Issues International developments • Joint Forum Working Group on Risk Assessment and Capital • Looking at how firms manage the funding of liquidity risk and how it is regulated • Stage 1 (2004) drew on regulators’ existing knowledge • Stage 2 (2005) filled in gaps in knowledge with a detailed questionnaire for firms • Range of Practices Paper published on the 3rd May 2006 http://www.bis.org/publ/joint16.pdf

  27. Liquidity Risk – Regulatory Issues Joint Forum results (1) • Diversity of approaches across sectors • Centralisation – range of practices • Across entities/ countries/ sectors • Diversity of approaches within sector • Main sources of liquidity risk • reliance on volatile or concentrated sources of funding • rating triggers

  28. Liquidity Risk – Regulatory Issues Joint Forum results (2) • Stress testing • Firm-specific vs. general • How severe? • Contingency funding plans • Reliance on secured funding • Impact of regulation • Liquidity rules in each jurisdiction • Limits on intra-group flows

  29. Liquidity Risk – Regulatory Issues The future • Lessons from DP24 • Basel Committee • International Standards? • EU involvement • Balance in a proportionate way – • Efficiency of firms’ own approaches • Benefits of harmonisation • Prudential concerns

  30. Liquidity Risk – Regulatory Issues European work - WGBD • Re-assess major groups LRM • Focus on potential impact on financial stability and cross-border banking activities • Report early 2007

  31. Liquidity Risk – Regulatory Issues International work – Basel Committee • New WG • Mandate: • Analytical stock take • Sharing of supervisory experience • No presumption of new standards

  32. Liquidity Risk – Regulatory Issues Challenges for FSA • Promote compatibility of international approaches • Understanding of internal models and how they could be used • Need for simple back stop? • Ensure sectoral comparability • Group implications • Pillar 2 / Pillar 3

  33. Liquidity Risk – Regulatory Issues Questions? Vincent.baritsch@fsa.gov.uk Tel: 020-7066-0526 Fax: 020-7066-0527

  34. Liquidity Risk – Regulatory Issues Existing regimes: other Building societies • Must hold ‘8 day liquidity’ > 3.5% of total share and deposit liabilities • 8 day liquidity includes CDs, CP, bank deposits • Limits on inter-society holdings

  35. Liquidity Risk – Regulatory Issues Bank of England reform of its operations in the Money Market Overview • Voluntary remunerated reserve scheme • Standing facilities

  36. Liquidity Risk – Regulatory Issues Voluntary reserve scheme – LRM benefits • Secure repository – Highly rated • Liquidity buffer • Double duty

  37. Liquidity Risk – Regulatory Issues Standing Facilities – LRM benefits • Ability to borrow unlimited amounts against eligible collateral • Major role in banks CFP’s

  38. Liquidity Risk – Regulatory Issues References • Sterling stock and mismatch regimes • See Chapters LS and LM in http://fsahandbook.info/FSA/html/handbook/IPRU-BANK • Stress testing and CFPs • See sections GENPRU 1.2 and SYSC 11 in http://www.fsa.gov.uk/pages/library/policy/cp/2006/06_13.shtml

  39. Liquidity Risk – Regulatory Issues Other regimes • Building societies regime • See Chapter 5 in http://fsahandbook.info/FSA/html/handbook/IPRU-BSOC • Securities firms regime • See sections 10-60 to 10-74 in http://fsahandbook.info/FSA/html/handbook/IPRU-INV

More Related