Join Mailing List

For latest news and information about Treasury and Financial Markets, enter your details below:

Improving Your ILAA

Print Preview Send to a Friend Share

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.


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:

  1. 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.
  2. 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.
  3. 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.

Displaying 1 to 6 of 6 results in total.

Related Documents

Free to ViewIs it in your your ILAA? 100% relevant

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.

Free to ViewPreparing your ILAA 76% relevant

12th January 2011

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.

Registration RequiredRegulation > Policy Statement 09/16 Stengthening liquidity standards October 2009 26% relevant

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.

Registration RequiredRegulation > Consultation Paper 08/22 Strengthening liquidity standards December 2008 26% relevant

31st January 2009

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".

Registration RequiredLiquidity 26% relevant

31st March 2014

Liquidity "Markets can remain irrational longer than you can remain solvent." JM Keynes • Definition • Risk drivers • Stress testing • Board responsibility • Days of survival • Buffers • Funds transfer pricing • Outcome

Free to ViewWhat's your risk appetite? 23% relevant

12th June 2010

The regulator is asking boards to define their risk appetite and risk tolerance. Whilst this insistence may be reasonable it certainly doesn't make it any easier to do. Just how do you measure the level of risk you have and then how do you relate that to your firm?