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Preparing your ILSA

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Published: 9th January 2011 by William Webster

An Individual Liquidity Systems Assessment (ILSA) is something that Simplified ILAS BIPRU Firms must prepare. It explains how liquidity risk is managed. For some firms it's a shock and time and resources can get stretched. Read how one client found the answer.


This firm had a simple business model. It took deposits via a small retail network using straight forward accounts. The money was used primarily for mortgage lending. ALCO managed risk with oversight from the board. The Chief Executive and Deputy Chief Executive 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 an ILSA. The regulator could call on this at any time in order to assess the systems and controls requirements surrounding the firm's liquidity management.

At the time the FSA'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:

1. 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.

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

3. Preparing the ILSA. Some of the information was available from management documents and the simplified BIPRU formula calculated the 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 ILSA 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 ILSA being in place before the appointed deadline.

At the same time management were 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.

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