Evolving Liquidity Issues
- 1. Evolving Liquidity Issues Presentation by R.S.Negi Sr.Manager Risk Management department BANK OF BARODA CORPORATE CENTRE MUMBAI
- 2. Outline FSA-Strengthening Liquidity Standards Reserve Bank of New Zealand- Liquidity Policy-June-2009 Lord Turner Report-March 2009 David walker Review- July 2009 BCBS principles for sound Liquidity Risk management and Supervision-Sep-2008
- 3. Introduction FSA has published a consultation paper 08/22 in December 2008 It aims to develop new framework for Liquidity Risk management. Three approaches to Liquidity management FSA has published a consultation paper 09/13 in April 2009 on Liquidity Reporting FSA has come out with a third consultation paper 09/14 of June 2009 on liquidity transitional measures
- 4. Three Approaches Self Sufficiency Whole Firm waiver Scheme Intra Group Firm Waiver scheme
- 5. Self Suffieciency No Dependency on Parent or Group Maintains all time Liquidity Resources sufficient to maintain severe stress Sufficient marketable or otherwise realizable assets Liquid Assets of appropriate maturity taking account of expected timing of outflows Able to generate funds from liquid assets in a timely manner Able to generate unsecured funding in a timely manner.
- 6. Whole Firm waiver Scheme FSA will expect to be satisfied with : Liquidity regime of home state regulator is more onerous than FSA Home state regulator follows “Principles for Sound Liquidity Management and Supervision” of BCBS dated Sep,2008
- 7. Whole Firm waiver Scheme Home state regulator does not prefer resident depositor than those in UK on the winding up of the firm Legal constraints imposed by home state regulator or any third country competent authority on provision of liquidity for UK branch Home state regulator will notify the FSA of any material or persistent breaches by firm of its liquidity rules
- 8. Whole Firm waiver Scheme Home state regulator is satisfied as to the size and quality of its liquid asset buffer and the size and quality of any liquidity resources that are held in UK Does not object to any undertaking by frim to FSA Gives due regard to the views of FSA
- 9. Whole Firm waiver Scheme Firm’s agreement with FSA It will make available liquidity resources at all times to UK branch Will make available to FSA information on an appropriate format on firm wide liquidity Notify the FSA as it notifies to home state regulator concerning the liquidity positions
- 10. Intra Group Firm Waiver scheme All conditions as in Whole Firm waiver Scheme FSA may also consider application for support from other group entities other than parent
- 11. Individual Liquidity adequacy Standards Individual Liquidity Adequacy Assessment (ILAA) Supervisory Liquidity Review Process (SLRP)
- 12. ILAA At least annually or more frequently Stress Testing-Short term (2 weeks), Long term, Idiosyncratic Stress as well as Market wide
- 13. SLRP ILAA review by FSA Individual Liquidity Guidance by FSA Advising amount and quality of liquidity resources appropriate for the firm Appropriate funding profile for the firm
- 14. Key Drivers of Liquidity Risk LRD- Explained.ppt Wholesale funding risk Retail funding risk Intraday liquidity risk Intra-group liquidity risk Cross-currency liquidity risk Off-balance sheet liquidity risk Franchise viability liquidity risk Marketable asset risk Non-marketable asset risk Funding diversification risk
- 15. Liquid assets buffer High quality government debt securities Securities issued by: African Development Bank Asian Development Bank Council of Europe Social Development Fund European Atomic Energy community European Bank for Reconstruction & Development
- 16. Liquid assets buffer European Community European Coal & Steel Community European Investment Bank Inter-American Development Bank International Bank for Reconstruction & Development/World Bank International Finance Corporation Nordic investment bank
- 17. Liquid assets buffer Reserve (Sight Deposit) with Central Bank of an EEA state, USA, Canada, Japan and Switzerland. Country of the Central Bank should have at least two of the following credit assessment: Aa3 or higher by Moody’s AA-or higher by Fitch AA-or higher by Standard & Poor
- 18. Liquid assets buffer Count Securities which are unencumbered, has legal title, and which a firm realizes on a regular basis FSA expects a firm to realize a proportion of the assets in its buffer periodically (either by repo or outright sale) to test its capacity to realise.
- 19. Implications for firms Less reliance on short-term wholesale funding Greater incentives for firms to attract a higher proportion of retail time deposits; A higher amount and quality of stocks of liquid assets A check on unsustainable expansion of bank lending during favorable economic times.
- 20. Current position of UK territory (31.03.2009) 2738 766 500 174 342 484 472 Total -466 -62 61 - 281 404 118 286 - 3M- 6M -517 -51 59 21 94 225 - 225 - 6M -12M 287 120 146 - - Investments Inflows 1236 541 200 103 17 Advances 455 333 122 - - Capital Funds 1010 85 5 173 236 Customer Deposits 1069 - - 316 635 Inter Bank/Branch Deposit 2534 418 127 489 871 Total -144 373 154 12M -36M +204 348 105 >36M - 204 1215 Total -404 -399 Cumulative Mismatch -5 -399 Mismatch 381 455 Placements Outflows 1M - 3M Upto 1M Particulars
- 21. Currency Mismatch as on 31.03.2009 277 26 Investment 205 -- Long term borrowing 1387 195 Advances 784 463 Customer Deposit USD GBP Composition (%)
- 22. Resource & Deployment 31.03.2009 Particulars 31.03.2009 Particulars 1,215 Placements 301 Borrowing 358 Non India based 1,010 Inter-bank 274 India based 425 Indian Corporates 632 GSC (of which) 140 Africa based 350 Trade Finance 240 225 Retail Corporate 254 Local Advances 465 Local Customers (of which) 1,236 Advances (of which) 2,040 Deposits (of which) £ going to £ coming from
- 23. Liquid Assets as specified for simplified ILAS firm +25% of un-drawn commitments +5% of all retail deposits due within 90 bussiness days Peak cumulative contractual net outflow over 90 business days (excluding retail deposits and inflows from TB) > Short term Sterling treasury bills
- 24. Cost Implication £ 166003 Average ongoing costs (per annum)-crisis time reporting £ 144880 Average ongoing costs (per annum)-business as usual £ 542158 Average one-off costs (solo branch reporting) Cost Description
- 25. Reports FSA047: EMR Daily Flows FSA048: Enhanced Mismatch Report (EMR) – Standard FSA050: Marketable Assets FSA051: Funding Concentration FSA052: Pricing Data FSA053: Retail and Corporate Funding FSA054: Currency Analysis Reports
- 26. Schedule of implementation Schedule
- 27. Reserve Bank of New Zealand Liquidity Policy June-2009
- 28. Main features Guidelines have been built upon the BCBS’s ‘Principles for Sound liquidity management and supervision’ Sept 08 Silent on liquidity transfer across group/firm Less stringent than FSA guidelines in UK. Liquid Asset buffer requirement less stringent than FSA in UK One week mismatch ratio------Minimum zero (Mismatch/Total funding) One month mismatch ratio-----Minimum zero (Mismatch/Total funding) One year Core funding ratio----Standard minimum =75% (core funding/total loans and advances) Reports for the liquidity reports are yet to be finalized by the Reserve Bank of New-Zeeland
- 29. Mismatch Ratio Mismatch Ratio =100*(Mismatch/Total Funding)
- 30. One-week mismatch ratio ---------------------Minimum = 0 One-week mismatch dollar amount = primary liquid assets after accounting for haircuts plus contractual inflows due within one week plus 75 per cent of undrawn committed lines granted to the bank available within one week, up to a maximum of 3 per cent of total funding from any one provider and a maximum of 9 per cent of total funding from all providers together minus interest payments and payments on derivative contracts contractually due within one week minus 100 per cent of wholesale funding withdrawable at sight or with residual contractual term within one week minus 10 per cent of retail funding withdrawable at sight or with residual contractual term within one week minus 15 per cent of the undrawn balance of committed lines, other than revolving retail facilities, granted by the bank drawable within one week
- 31. One-month mismatch ratio ----------------------Minimum = 0 One-month mismatch dollar amount = primary liquid assets after accounting for haircuts plus secondary liquid assets after accounting for haircuts plus contractual inflows due within one month plus 75 per cent of undrawn committed lines granted to the bank available within one month, up to a maximum of 3 per cent of total funding from any one provider and a maximum of 9 per cent of total funding from all providers together minus interest payments and payments on derivative contracts contractually due within one month minus 100 per cent of wholesale funding withdrawable at sight or with residual contractual term within one month minus 15 per cent of retail funding withdrawable at sight or with residual contractual term within one month minus 15 per cent of the undrawn balance of committed lines, other than revolving retail facilities, granted by the bank drawable within one month
- 32. Total Funding Total Funding = Wholesale + retail funding Retail funding is defined as: (a) deposits/debt securities held by natural persons; and (b) deposits/debt securities held by small and medium-sized bodies corporate and Crown and government organisations, excluding financial institutions. Wholesale funding is defined as : (a) all other securities issued by the bank.
- 33. Total Funding A Crown or government organisation is small or medium-sized if its total assets held at the registered bank or at the banking group (as applicable, following the scope of consolidation being used for the calculation) were not more than NZ$1,000,000 on the most recent date at which the bank assessed the categorisation of that organisation. A body corporate other than a Crown or government organisation is small or medium-sized if its total assets, plus the total assets of its associates and affiliates, held at the registered bank or at the banking group (as applicable, following the scope of consolidation being used for the calculation) were not more than NZ$1,000,000 on the most recent date at which the bank assessed the categorisation of that body corporate.
- 34. One year Core Funding ratio-------------Minimum = 75% One year core funding dollar amount = wholesale funding with residual maturity longer than one year, including subordinated debt and related funding plus retail funding with residual maturity longer than one year plus 90 per cent of retail funding withdrawable at sight or with residual maturity less than or equal to one year plus Tier 1 capital
- 35. One year Core Funding ratio-------------Minimum = 75% Core funding ratio = 100 x (One year core funding dollar amount / total loans and advances) Liquid Assets
- 36. Reporting requirement Consultation Paper-New zealand.pdf
- 37. Lord Turner Review A regulatory response to the global banking crisis March 2009
- 38. What went wrong ? The growth of the financial sector Increasing leverage Changing forms of maturity transformation Misplaced reliance on sophisticated maths Hard-wired procyclicality
- 39. What to do ? Overall capital in the global banking system should be increased above existing Basel rules Capital requirement to be significantly increased for trading book activites Avoid procyclicality Use through the cycle probabilities of default rather than point in time
- 40. What to do ? Introduce counter cyclical capital adequacy regime Example: Bank of Spain Economic Cycle Reserve to be created Maximum Gross Leverage Ratio to be introduced Liquidity regulation and supervision should be recognised as of equal importance to capital regulation
- 41. What to do ? More intense and dedicated supervision of individual banks’ liquidity positions Introduction of ‘Core Funding Ratio’ Retail deposit insurance should be sufficiently generous Credit rating agencies to be subject to registration and supervision Independent Risk management Function
- 42. What to do ? The Skill level and time commitment required for non-executive directors of large complex banks Establishment and effective operation of colleges of supervisors for the largest complex and cross border financial institutions.
- 43. David Walker Review Currently Senior Advisor – Morgan Stanley Earlier Roles Chairman – Morgan Stanley Intnl. Assistant Secretary of Treasury, UK Chairman of Securities and Investment Bank Chairman of Lloyds bank, London investment Bankers Association
- 44. Walker Review Total of 39 recommendation Board size, composition and qualification (5) Functioning of the Board and Evaluation of performance (8) The role of institutional shareholders: communication and engagement (9) Governance of Risk (5) Remuneration (12)
- 45. Walker Review Report deals with Corporate Governance Weakness in Risk Management, Board Quality and Practice, Control of Remuneration Principle deficiencies in Board related to much more to patterns of behavior than to Organization Board level engagement in the high level risk process to be increased
- 46. Walker Review Full independence in the Group Risk Management function NEDs to give more time commitment (Minimum 30 to 36 days)