Liquidity Shock to Solution

This firm had a simple business model. It took deposits via a small retail network using straightforward accounts. The money was used primarily for mortgage lending. ALCO managed risk with oversight from the board. The Chief Executive and Deputy Chief

Executives were widely involved in the day-to-day business issues. This aspect of how close senior executives in smaller firms get to the "front line" is not always fully appreciated by regulators.

The Risk:

The management of this firm was obliged to put in place a Liquidity Assessment. The regulator could call on this at any time to assess the systems and controls requirements surrounding the firm's liquidity management.

At the time, the regulator's articulation to the industry of what was required was deficient. This meant the firm could produce a document later deemed to be insufficient.

They risked increased liquidity buffers despite the fact that liquidity ratios exceeded those of banks. Any increased buffer would also adversely affect the firm's profitability and capital position.

Time was limited. This document needed to be in place, but day-to-day issues precluded an immediate start to the work by the management.

The Proposal:

An initial meeting with the Chief Executive and Deputy Chief Executive quickly identified that additional resources were required. The proposal was as follows:

Understanding the business: This would be an immersion in the business strategy, risks, and controls currently in place. The purpose was to rapidly assimilate the risks that were present with particular reference to liquidity.

Building a pro-forma: This would be a blueprint based on both the regulator's own recommendations and the unique set of circumstances that this firm faced in managing its liquidity risks.

Preparing the Liquidity Assessment: Some of the information was available from management documents, and the simplified regulatory buffer requirement. Additional information needed to be drafted. In particular, risk methodologies surrounding risk appetite and stress testing needed attention. This led to the first draft, which was reviewed by ALCO.

The Board addressed its specific responsibility for liquidity risk and its wider oversight role. This challenge was documented, and the Liquidity Assessment was approved.

The Outcome:

This client needed external expertise quickly to solve a pressing regulatory risk. That is what happened.

By using a simple plan of action and a list of items, an intensive period of work led to the assessment being in place before the appointed deadline.

At the same time, management was not distracted from their day-to-day tasks. The document is "owned" by the client and is a "living document". It reflects all their risks, systems, controls, and methods.