Liquidity models and markets How compatible are they? Hosted by: - - PowerPoint PPT Presentation

Liquidity models and markets – How compatible are they?

Hosted by:

Jesse Hopkins, CeFPro

Presenters:

Chris Blake, HSBC Brandon Davies, Obillex Limited, Former Barclays Fitz Drummond, Deutsche Bank

Fitz Drummond Director, Funds Transfer Pricing, Treasury Deutsche Bank

Meet the Webinar presenters…

Chris Blake Senior Manager Liquidity & Risk HSBC Brandon Davies Board Director, Obillex Limited, Former Head of Market Risk Barclays

• Liquidity regulation is a new feature of Basel banking

regulation which has focused since its 1982 origins on capital regulation.

• Prior to Basel, however, capital played a very subordinate

role to “natural” liquidity in Central Banks supervision of commercial banks (short term assets and liabilities).

• Today bank balance sheets have very poor “natural”

liquidity being dominated by short term funding and long term assets such as mortgages.

• Prior to the 1980’s mortgages were a scarce asset on bank

balance sheets.

• As a consequence the ability to turn assets into cash

through market sales (market liquidity) has gained importance

Liquidity

• What is a board interested in?
• VALUE OF THE BUSINESS
• What underpins this?
• FUTURE CASH FLOWS
• What affects these future flows?
• STRATEGY
• BUSINESS MODEL
• THE STATE OF THE WORLD

Liquidity

• So where does liquidity fit in their agenda.
• Regulation affects the current and future

competitive position of the business

• But not as much as technology
• But not as much as the macro-economic

environment

• Regulation is more or less known now though

uncertainty over it has been a major headaches for boards for nearly a decade

Liquidity

• Technology is changing fast, all banks should

claim to be FinTechs now.

• Technology has 3 challenges for boards
• Business Strategy and its effects on the

Business Model – Big Data, Artificial Intelligence etc.

• Business Model Efficiency – A Net Gain?
• Business Risk – Notably Cyber Risk

Liquidity

• Liquidity impinges on all of these:-
• What liquidity do we need and will the market provide

it?

• If not will the Central Bank support market liquidity as

buyer of last resort?

• Funding Liquidity – sources of deposits now a “run” is

24/7/365 the branches close the internet does not + MiFID2 (Open Banking)

• Market Liquidity - States of the World Change, we

have had a decade plus of falling interest rates.

• Could any stress scenario in 1955 have predicted the

future?

Liquidity

Liquidity

Liquidity

Liquidity Coverage Ratio

Comprehensive Resource Management Under Stress

High Quality Liquid Asset Buffer Outflows – Inflows [Max 0.75*Outflows]

>= 100% Balance Sheet and Liquidity Planning Scenario Analysis Reporting Frequency and Granularity Limit Setting & Monitoring Optimal Granularity Funds Transfer Pricing Cost of Liquidity

Net Stable Funding Ratio

Optimising Term Profile and Cost

Available Stable Funding Required Stable Funding

>= 100% Balance Sheet and Funding Planning Tenor Profile Reporting Frequency and Granularity Limit Setting & Monitoring Optimal Granularity Funds Transfer Pricing Cost of Term Funding

Relationship between regulatory and internal models

Internal Stress Test Liquidity Coverage Ratio

Identify Gaps Challenge Internal Model Optimise FTP & Controls

Committed Facilities Derivatives MTM Volatility Deposits Roll-off Etc

Potential Impact of LCR: Additional Buffers q What is your constraining measure? q What is the basis of FTP q What is the basis of limits framework and planning? Potential Impact of NSFR: Extended duration

Are we actually asking the wrong question?

• Maybe the more nuanced question should be. “ Are funding models and markets

compatible with making a sustainable return for shareholders”

• Is “models” the correct terminology. You might argue that models try to predict

future behaviour or consider past behavior.

– The regulatory calculations inside LCR and NSFR do neither of the above. – They are functions of political, regulatory and central bank decisions. – Most of the time we are trying to interact BAU understanding with stress regulatory models, this is the main challenge.

• The LCR is mildly painful from a bank/markets perspective, but is implemented

and working.

• Generally investment banks help make markets

– The above implicitly means the holding of short term positions. – But NSFR is a long term measure- is this compatible?

PUBLIC

A UK Nuance- Structural Ring Fencing

• Structural ring fencing means more of the market making operations have to

stand alone.

– Is this compatible with a funding metric? – Does this lead to more risk in a ring fenced bank due to its inability to provide itself with appropriate liquidity under stress ? – Has everyone forgotten the behaviouralisation involved in these metrics? – Might the impact be a reduction in market liquidity – The impact would be increased reliance on the central bank as the lender of first resort or the counterparty of first resort.

PUBLIC

Thank you for attending

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Exploring the liquidity risk landscape including market trends and regulatory requirements. View full speaker line-up and agenda at www.cefpro.com/liquidity

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