Regulation

Related Documents

Funds Transfer Pricing

17th January 2012

Summary: For banks and societies FTP is not an option it's mandatory. Pooled funding is insufficiently granular for the risks that are now apparent. For most firms some type of matched maturity method either using market yields, derived yields or retail funding costs provides the base cost of funding. This needs to be adjusted to include the additional costs you have identified, for example the buffer cost. Each product will have a different set of costs based on the risks that it creates and the costs associated with hedging those risks. Embedding FTP is as important as calculating it. It's an area that's open to regulatory challenge and you need the evidence to back you up. More...

Dear CEO letters

14th October 2011

On several occasions I have been asked about Dear CEO letters. These letters normally focus on a theme where the regulator has found weaknesses in the way firms manage their business. A formal response is often required. How seriously should you take these letters and your response?

Basel III

12th August 2011

Basel III is about tightening up the capital and liquidity requirements for financial institutions. Whilst regulators and politicians want to avoid further bails outs there is a danger that the new rules could add further disruption to the credit system. It therefore follows that the new legislation will take at least a decade to be applied and in the process it will be subject to alteration. To be clear bank regulation is very much in the "melting pot". For many firms Basel III will increase the costs of doing business. Banks that find ways to change what they do or the way they do it will use their capital more effectively (aka leverage). This quick guide considers tiers 1, 2 and 3, the credit value adjustment, the liquidity coverage ratio, the net stable funding ratio and the possible effect on firms.

Liquidity Swaps

4th August 2011

Put a bank that has difficulty in raising liquidity in a room with an insurance company that's looking for yield and what do you get?

Understanding Risk

26th May 2011

Presentation Treasury Audit Group 25th May 2011

ILSA Final Guidance

29th April 2011

It's the 5th May 2011 and I've just received an email from the FSA reminding me that the Individual Liquidity Systems Assessment (ILSA) Finalised Guidance is now available. This may not mean much to you. That's unless you fall under the simplified liquidity regime in the UK. The FSA's guidance is about what they expect to see and the good news is it's a far better document than its predecessors. So what does the FSA expect?

Reverse stress testing is not stress testing

9th March 2011

The FSA has issued guidance consultation on reverse stress testing (Reverse stress-testing surgeries - FAQ). Some firms will fear that because reverse stress testing is relatively new the regulatory process will involve trial and error. So how can you undertake reverse stress testing and have a good chance of doing it well first time round? Using the maxim of KISS here are 24 FAQ.

Transitional Provisions

20th January 2011

Just in case you missed it consultation paper 11/1 now extends the time simplified ILAS BIPRU firms have to reach their buffer requirement. The relevant points are below.

Is it in your your ILAA?

6th January 2011

The FSA's proposed Dear CEO letter (Review of implementation of systems and controls requirements in liquidity regime dated December 2010) tells you that if it's not in writing it doesn't exist.

Liquidity How It's Shaking Down-presentation

27th November 2010

Presentation to The Local and Regional Building Societies Conference, Ettington Chase, 25th November 2010. The presentation is here. The content of the speech is in the previous article.

Liquidity How It's Shaking Down-speech

27th November 2010

Speech to The Local and Regional Building Societies Conference, Ettington Chase, 25th November 2010. This is about liquidity.

Liquidity Calibration

23rd November 2010

Is a two tier liquidity regime in place? At a conference in January 2010 I warned that firms on the simplified ILAS regime could find it worked against them. My premise was as follows.

ILSA Guidance Consultation

19th November 2010

Letter 17th November 2010 to the FSA regarding Guidance consultation Individual Liquidity Systems Assessment (ILSA) - Simplified ILAS BIPRU Firms November 2010.

ILSA Submission Information

16th November 2010

On 9th November 2010 the FSA issued proposed guidance on Individual Liquidity Systems Assessment (ILSA) Submission Information. It is a revised version of a document released earlier this year and attempts to clarify what's required. If you are putting together your ILSA the following may help:

Telephone Taping

15th November 2010

Dealers are human and they do make mistakes. These can come to light quickly or later during the confirmation process. Classic errors include rates, amounts, maturities and even what has been bought or sold.

Suppose big banks move their HQs out of the UK

5th September 2010

Now we are examining the entrails of the crisis one potential outcome is to break up the largest banks. The Commission on Banking will take evidence and decide whether this is a "good thing". No doubt concerted lobbying will occur. This makes the veiled threats to move "offshore" by some of the largest UK banks puzzling. Bank CEOs clearly aren't comfortable with the prospect of separating investment and retail banking apparently one can't work without the other. But if investment banking is so profitable why can't it do without the stolid retail business? It's straight forward. Investment banking gets two huge benefits from being wrapped up with retail banking. Let's see why.

Discussion Paper 10/4

3rd September 2010

This DP raises questions about the capital charge for trading books. Look more closely and you will find that the regulation of investment banking by the FSA is ineffective. Furthermore there is no reason to think that in the future it will improve. Investment banks will continue to run risks that periodically threaten their solvency. Their current interconnection with the retail deposit business means government support is guaranteed. A pragmatic solution would be to disentangle investment banking from the retail business. This free market approach is much favoured by investment bankers for other industries. Good business flourishes and bad ones die without placing a burden on the taxpayer. Now let's see why regulation won't protect us.

Reverse stress testing

20th August 2010

What is reverse stress testing? It is the process of uncovering events that, should they occur, have the potential to make your business unviable. Such events can cover credit, market and liquidity risk. It's important to remember that business failure occurs before you run out of capital. It's when counterparties are unwilling to deal with you.

Living documents

16th July 2010

If you have read some of the UK regulator's policy then you may well have come across the term "living document". What does it mean?

Policy Statement 10/5

21st April 2010

Policy Statement 10/5 A specialist sourcebook for building societies: Enhanced supervisory guidance on financial and credit risk management. March 2010. The following refers to treasury management What's it about? This PS follows on from CP09/17. It's about how the FSA expects building societies to manage their treasury business. The resultant Building Societies Sourcebook (BSOCS) isn't too complicated but putting it all into practice may prove to be a challenge. A society is expected to align itself with one of five approaches used to define treasury risk management.

Regulation > Does liquidity risk overshadow market risk?

23rd January 2010

In a world where regulators are focusing on liquidity and capital it's easy to overlook market risk. In many firms this means interest rate exposure. In the UK with Bank Rate at an all time low it's tempting to think that hedging fixed rate assets is just a waste of money. After all why pay 3.25% on a 5 year swap when 3 month Libor is only 51 basis points? Surely matching the interest basis on assets and liabilities ends up costing you 274 bps doesn't it?

PS 10 5 presentation January 2010

15th January 2010

This presentation is about the introduction of new liquidity standards in the UK. It was delivered to bank and building society executives and NEDs in January 2010.

Regulation > Predicting the future just got easier

4th January 2010

Leafing through the pages of the Sunday Times late in December 2009 reminded me how dangerous predictions can be. Economic forecasts made a year earlier by leading institutions proved in many cases to be well off the mark. To be fair it's always been a mine field. But there is one area that I can safely predict in the coming year. That's regulation.

Regulation > Policy statement 09/20 Stress testing and scenario testing December 2009

18th December 2009

What's stress testing about? The regulator is imposing a stress testing regime on firms because the risk management techniques employed before the crisis did not accurately reflect what could happen. In particular risk models allowed firms (and regulators) to ignore tail-risks. As a result many firms have found themselves badly exposed in the crisis. In order to mitigate against this happening again the FSA is making stress testing and reverse stress testing mandatory. Let's answer a few questions.

Regulation > Liquid assets

14th November 2009

Two things took my eye in the FSA's Policy Statement 09/16 - Strengthening liquidity standards. I thought I might share them with you. The first altered my opinion, the second puzzled me.

Regulation > Policy Statement 09/16 Stengthening liquidity standards October 2009

7th November 2009

Policy Statement 09/16 Strengthening liquidity standards refers to earlier consultation papers CP08/22, CP09/13 and CP09/14 and the comments received. In general whilst the FSA acknowledges many of the issues raised little has altered in the final policy. Firms will be expected to be self sufficient for liquidity purposes. Senior management is responsible for reviewing the level of liquidity, compliance and reporting to the Board. The FSA highlights that many firms have been unable to identify and report contractual cash flows on a regular basis. This will be unacceptable. Non compliance will be treated with regulatory sanction. How a firm is subject to Individual Liquidity Adequacy Standards (ILAS) depends on the size of the firm and the risks it presents. The ILAS framework comprises an Individual Liquidity Adequacy Assessment (ILAA), a Supervisory Liquidity Review Process (SLRP) and Individual Liquidity Guidance (ILG). Firms are obliged in the ILAA to undertake robust stress testing. The purpose of this is to show that the firm fully understands its liquidity risk. ILAS firms will need to report the stress test results in their ILAA. Liquidity management systems, controls and stress testing are all board responsibilities. The ILG is the amount of liquid resources the FSA expects a firm to hold. This will contain "guidance" on the amount of the liquid asset buffer and the firm's funding profile. As an incentive for firms to improve their systems and controls, the FSA will increase the amount of liquidity the firm must hold. Deposits at the central bank and tradable securities issued by the central bank will count towards the buffer. Holding currency denominated bonds should take into account potential problems in the FX market. For this reason a domestic bank with mainly sterling liabilities must hold its buffer in gilts. The FSA now require firms to price the cost of liquidity into products. This should mean that the cost of holding the liquidity buffer is passed on to those customers that create a stressed outflow requirement. The new regime will be phased in. The scope and application of the new rules will depend on the importance of the firm and its ability to create systemic risk.

Regulation > Do liquid assets give you risk?

14th October 2009

This is written for anyone interested in liquidity. Here's a brief summary. Firms will be required to hold substantially more liquidity (20%); T-bills, cash and treasuries (Gilts) will be the main recipients; Gilts are not risk free; Interest rate risk can be hedged; Swap spread risk, (basis risk), can't and the risk can be large; Try the liquid asset KISS test; It's the balance sheet structure that will give you the edge (is that what individual assessments are about?)

Regulation > Consultation Paper 09/17: A Specialist Sourcebook for Building Societies June 2009

1st August 2009

The general thrust of the CP is that Societies must prove that they have both the management and the systems capable of effectively dealing with the risks they face. This is part of the enhanced supervisory approach now adopted by the FSA. It states that systems and controls must match the level of complexity in a firm's business model. The FSA will adopt a more interventionist approach in order to ensure this is the case. The proposal is that building societies and the regulator will determine whether the risk management policies adopted are appropriate. Where they are not the Society can either simplify its business or improve its risk management. The FSA also intends to limit societies diversifying their business without a full assessment of capital adequacy. The FSA has considered applying similar CP 17 guidance to the banking sector but has decided on account of the "lack of homogeneity" that this would not be practical and in their case a firm-by-firm approach is more appropriate. The CP addresses treasury and lending. It contains five approaches to treasury management, three areas of treasury guidance and three approaches to lending. Consultation closes on 5th September 2009 with implementation due in early 2010 when a new Building Societies Sourcebook (BSOCS) will replace IPRU-BSOC.

Regulation > CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures June 2009

29th June 2009

The FSA presumes that every firm must be self sufficient for liquidity purposes unless a waiver is granted. The systems and controls requirement applies to all firms from Q4 2009 and will have no phased or transitional introduction. This is a summary of the CP.

Regulation > CP 09/13 Strengthening liquidity standards 2: Liquidity reporting April 2009

28th April 2009

This CP is mainly concerned with questions about what firms should report and the frequency and scope of reporting. The Individual Liquidity Guidance (ILG) will lead to a strengthening of firms' liquidity over a period of several years. The rules and guidance on liquidity risk including the transitional arrangements are to be effective in Q4 2009. New reporting arrangements are to go live in Q1 2010.