Preparing your ILAA

Published: 12th January 2011 by William Webster

Not all banks have teams of people who can prepare an Individual Liquidity Adequacy Assessment ILAA. For small banks in particular the fear is that your ILAA doesn't live up to expectations and the regulator makes this clear in the SLRP. Read how one bank found a solution.

Background

Like all Standard ILAS BIPRU firms this bank had to prepare an ILAA. The FSA had provided an indication of what was expected. The preparatory work was going to be undertaken by treasury and finance. This was where the day-to-day control of liquidity resided. The board would then need to make its assessment.

The Risk

In theory the ILAA was easy to write. But as soon as pen went to paper it all got a lot harder, there were questions about the meaning of BIPRU 12, what the ILAA should contain, why the FSA submission template repeated itself, how the FSA would play the buffer number and how much board input was warranted.

The risk was that the whole process would take a lot longer than necessary, the board would waste its time and the finished result would be compromised.

This was Barbican Consulting's solution:

The proposal

There were five stages:

1. The skeleton of risk. This involved identifying the main liquidity drivers, stress testing and the provision of quantitative information. This was not a mechanical process. It involved discussion and deliberation about how the buffer would be determined.

2. Assembling the case. This took the information and prepared it in accordance with the submission template. The result was a basic ILAA document that could now be used to lead discussion.

3. Preparing the board. This involved presentations about the liquidity regime, their responsibility and the inherent liquidity risks in the balance sheet.

4. Draft ILAA submission to the board. This prompted debate and review. The ILAA was revised in accordance with the board's judgment.

5. Approval. Subsequent to revision the board approved the ILAA.

The Outcome

The ILAA was developed in a logical order and it was completed on time. The bank retained control over the quantitative and qualitative aspects of the ILAA taking advice on the preparation and methodology as deemed necessary.

External expertise was used as required. It kept costs down but speeded up the process. It also meant a critical and objective third party opinion supported the drafting process.

Thorough preparation by the board regarding its understanding of BIPRU 12 and the risks the bank faced improved the debate and facilitated changes that were considered necessary given its risk appetite.

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This CP sets out the FSA's plans to reform the liquidity regime. It requires firms to undertake a much more rigorous analysis of their liquidity position. This includes the effect of stressed conditions on their business. The firm will submit what it considers to be an appropriate liquidity buffer to the regulator. The FSA will then decide whether it is sufficient. In determining the buffer the FSA will also assess the firm's systems and management. If these are considered weak the buffer will be increased accordingly. The liquidity buffer can only be held in liquid assets. The FSA's view is that this primarily means Gilts, sovereign debt or central bank deposits. The FSA makes it clear, "The responsibility of adopting a sound approach to liquidity risk management is on firms and their senior management".