Telephone: +44 (0)20 7920 9128
Email: [email protected]
Web: www.barbicanconsulting.co.uk
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
The Outcome
For the client there were three main advantages of this process:
Displaying 1 to 6 of 6 results in total.
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.
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.
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.
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".
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
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?