Improving Your ILAA

Published: 18th December 2012 by William Webster

Sometimes you have done all the necessary work for your ILAA but later on you need a thorough review in order to tighten things up. Why?

Because eighteen months ago when you prepared things it took up a lot of time and resources and you knew that it would require a bit of TLC at a later date.

Now things have moved on and regulation, as far as it can be, has become a little clearer. It’s time to get some independent advice and expertise in order to feel comfortable that you can deal with any regulatory scrutiny.

Background

Like all Standard ILAS BIPRU firms this bank had prepared an ILAA. But the process was complicated by the type of business being conducted and the relationship with Head Office. For foreign owned banks this can create questions. Just how will the regulator treat them and how much buffer will they need to hold? After all in London where costs are already high any additional regulatory burden can question the raison d’etre.

The Risk

The UK regulator has its own way of doing things. And whilst much of this is in the form of guidance there are rules about what is expected from BIPRU 12. Indeed the regulator uses data collected from individual banks in order to monitor liquidity. If you have an unusual or different business model this doesn’t neatly fit with the UK regime. Departures from the expected format need to be explained in full. Otherwise a relatively onerous liquidity buffer may result.

This was Barbican Consulting's solution:

The proposal

To review the existing ILAA and the business being undertaken by the bank in order to understand the nature of the liquidity risks being faced.
To improve and substantiate the content of the ILAA including where appropriate risk appetite; risk drivers; economic scenarios; stress testing (idiosyncratic, market and combined risk); reverse stress testing,
To identify and agree the buffer requirements (both quantity and type)
To improve where possible contingency funding plans;
To suggest the appropriate form and levels of management information;
To consider next step for funds transfer pricing and recovery and resolution;
To provide a clear explanation to senior management so they can undertake a full discussion regarding the risks and their actions;
To provide a written draft ILAA

The Outcome

For the client there were three main advantages of this process:

Overcoming inertia: The earlier ILAA can be used as a starting point but often it’s difficult to take things further because there is too little time and resource available and it’s difficult to know where to start.
Experiencing challenge: The preparation process stimulates discussion, debate and challenge. It allows the client to explain their business to an independent third party. In so doing risks can be uncovered and looked at from a different perspective. Arguments can be tested for robustness before the supervisory review.
Delivery: For this client a new and updated ILAA was prepared ready for senior management approval. The work was completed within the deadline and budget.

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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".