Liquidity Risk Supervision of Large Banking Organizations Any - - PowerPoint PPT Presentation

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Liquidity Risk Supervision of Large Banking Organizations Any - - PowerPoint PPT Presentation

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Liquidity Risk Supervision of Large Banking Organizations Any opinions expressed are the authors alone and do not October 28, 2014 necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System Topics

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Liquidity Risk Supervision of Large Banking Organizations

October 28, 2014 Any opinions expressed are the authors’ alone and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System

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Topics

  • Reflecting (just a bit) on lessons learned from the crisis
  • Supervisory Response
  • Quantitative Liquidity Measures
  • LCR and NSFR
  • Interagency Policy Statement on Funding and Liquidity Risk

Management

  • Liquidity requirements of Reg YY (DFA Section 165)
  • Reporting Requirements
  • 2052 and LCR reporting
  • Horizontal Liquidity Reviews
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Lessons Learned from the Crisis

  • Firms had a high reliance on short‐term wholesale funding
  • Firms did not fully capture all the liquidity risks in their portfolio

and size them appropriately

  • Firms relied on contingency funding sources to meet liquidity
  • utflows and did not have robust on‐balance sheet liquidity

buffers

  • Firms overall contingency funding plans were not well articulated
  • Senior management and the board of directors were not well‐

informed of overall liquidity risk

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Supervisory Response

  • More differentiation, based on size and systemic footprint (and a

focus on SIFIs)

  • More horizontal coordinated views and reviews
  • Expansion of purview beyond banks
  • Increased International Coordination
  • Introduction of standardized minimum quantitative liquidity

requirements (for the first time)

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Overview of select Liquidity Guidance and Rules

  • September 2008
  • Basel issued principles for Sound Liquidity Risk Management
  • March 2010
  • Interagency Policy Statement on Funding and Liquidity Risk Management
  • January 2013 Basel III
  • Liquidity Coverage Ratio
  • January 2014
  • BCBS NSFR Consultative Document
  • Feb 2014
  • DFA 165 Enhanced Liquidity Requirements
  • Sept 2014
  • U.S. LCR for largest, internationally‐active banking organizations
  • U.S. Modified LCR for BHCs above $50 billion but below internationally‐active
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Quantitative Liquidity Standards

  • BCBS approved two liquidity rules for global banks in December 2010:
  • Liquidity Coverage Ratio (LCR) – 30‐day horizon (effective 2015‐2019)

 Requires firms to have a stock of high‐quality liquid assets that

exceeds standardized net cash outflows over a 30‐day stress period.

  • Net Stable Funding Ratio (NSFR) – one‐year horizon (effective in

2018)

 NSFR is a longer term structural metric designed to ensure banks’

funding structures are appropriate relative to their asset and off‐ balance sheet profile.

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Scope of Application: U.S. LCR

  • US LCR rule
  • Applies to internationally active banking organizations, and non‐bank financial

companies designated by the FSOC that do not have substantial insurance

  • perations.
  • Generally includes BHCs and SLHCs with at least $250 billion in consolidated assets
  • r $10 billion in foreign exposures, and their largest bank subsidiaries (>$10 billion

in assets).

  • Less‐rigorous LCR (“Modified LCR”)
  • Applies to non‐internationally active BHCs and SLHCs (but not banks) that are

subject to DFA 165.

  • Generally includes BHCs and SLHCs with at least $50 billion but less than $250 billion

in consolidated assets.

  • Separately considering how best to tailor the liquidity requirements for

companies not covered by this proposal (e.g. those with substantial insurance

  • perations, and the IHCs of FBOs)
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Rationale for Modified LCR

  • BHCs subject to Modified LCR are sufficiently large/ complex to

be subject to a quantitative liquidity requirement promoting their liquidity resilience and allowing market participants and supervisors to better compare firms liquidity position

  • BHCs subject to Modified LCR face a less‐stringent liquidity

requirement because:

  • Tend to be less complex due to smaller asset size and lower level of foreign

activity

  • Activities are less systemic in nature than internationally active firms
  • Consistent with gradation requirement in DFA 165, and help mollify the

“cliff” affect

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Differences of Proposed Modified and Required LCR

Required LCR

  • Applied to internationally active

banking organizations, and non‐ bank financial companies designated by the FSOC that do not have substantial insurance

  • perations.
  • Contractual outflows and inflows

recognized in the first 30 days

  • Full non‐maturity outflow rates

apply

  • Net outflows and inflows

calculated on the peak maximum cumulative outflow date within the 30 day period. Modified LCR

  • Applied only to the consolidated

BHC and not to the bank subsidiaries

  • non‐maturity outflow rates

subject to a multiplier of 70%

  • Net outflows and inflows would

be calculated only at the end of the 30 day period and not on the peak maximum cumulative

  • utflow date within the 30 day

period

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How U.S. LCR fits into Regulatory Framework

Establishes a stress scenario

  • Assigns specific

 Haircuts to assets  Runoff rates to liabilities  Draw rates to commitments

  • Calculates surplus/deficit

So far so good, but . . . .

  • One scenario, one time frame, cannot reveal all liquidity vulnerabilities

specific to a firm

  • Assumptions are standard, not tailored to the products and markets in which

each institution is operating Not designed to be a risk management program

  • Regulatory compliance is necessary, but not sufficient
  • Can provide a useful framework from which to build/improve liquidity stress‐

testing exercise

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Interagency Policy Statement on Funding and Liquidity Risk Management (SR 10‐6)

  • Corporate Governance – board of directors and senior management
  • Strategies, policies, procedures and risk tolerances
  • Liquidity risk measurement and reporting
  • Intraday liquidity position management
  • Diversified funding
  • Cushion of liquid assets
  • Contingency funding plans
  • Internal controls
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DFA 165: Enhanced Liquidity Requirements

  • Section 165 of the DFA directed the FRB to establish stricter prudential

standards for all BHCs with $50 billion or more in total assets and nonbank SIFIs, and that the stricter standards must include liquidity requirements.

  • The rule includes:
  • Governance requirements that specify board, risk committee, and senior

management responsibilities, in addition to independent evaluation requirements.

  • Requires firms to conduct regular stress testing, conduct cash flow

analysis, and set certain liquidity risk limits.

  • Requires covered companies to maintain a buffer of highly liquid assets

against internal 30 day (bank‐derived, supervisor‐reviewed) liquidity stress tests.

  • Requirements for foreign companies to maintain asset buffers in the U.S.
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Internal Stress Test and LCR, complementary tools

  • Limitations of one‐size‐fits‐all regulatory construct
  • Reg YY provides expectations and framework for conducting liquidity

stress testing (scenario type, time buckets, etc)

  • Buffer‐sizing requirement based upon meeting outflow estimates under 30

day internal stress test

 Some stipulations on buffer qualification  Watching that does not create disincentive to run sufficiently stressful scenarios

  • Defaulting to LCR scenario, asset/liability categorization, and

assumptions (haircuts/runoffs) for internal stress tests is not sufficient

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Internal Stress Test coverage vs. LCR

0% 50% 100% 150% 200% 250% 300% 350% 400% 450% Coverage Ratio LCR FIST

FIST = Firm Internal Stress Test: results of firms’ most severe scenario, including all contingent sources, as measured by internal MIS

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Timeline for Liquidity Rules and Reviews

  • DFA 165/Reg YY liquidity standards
  • Compliance required for domestic firms and foreign‐owned US BHCs January 1, 2015
  • Foreign firms’ IHC formation plans to be submitted by Jan 2015, to be formed by mid‐2016
  • US implementation of Basel III LCR
  • Finalized Sept 2014
  • Muni HQLA inclusion proposal (an amendment to the final rule) to come
  • Application to FBOs to come
  • Basel NSFR
  • Expect to be finalized at the BCBS in 2014 (for 2018 implementation)
  • Expect US proposal to implement the NSFR to follow
  • Liquidity supervisory reporting
  • Finalized 2052 (a + b) liquidity reporting in August 2014, reporting to begin soon
  • LCR reporting requirement to come
  • Horizontal Liquidity Reviews
  • CLAR for top LISCC firms in its third year
  • LBO horizontal liquidity reviews commenced in 2014
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Liquidity Supervisory Reporting

Report Number Reporter Description Frequency As-of Date Submission Date FR 2052a U.S. BHCs that the Financial Stability Board designated as Global Systematically Important Banks (G-SIBs) Daily 09/11/2014 09/15/2014 FR 2052a Foreign banking

  • rganizations with U.S.

broker/dealer assets > $100 billion On Occasion (FR 2052a; complete report) Twice a month (FR 2052a; abbreviated report) TBD Advanced notice from supervisors 09/11/2014 TBD Advanced notice from supervisors 09/15/2014 FR 2052b U.S. BHCs (excluding G-SIBs) with total consolidated assets greater than $50 billion (including FBO subsidiaries) Monthly 11/30/2014 12/15/2014 FR 2052b U.S. BHCs (not controlled by FBOs) with total consolidated assets

  • f between $10 billion

and $50 billion. Quarterly 12/31/2014 01/15/2015

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17 Bart Miller Market & Liquidity Risk Supervision Federal Reserve Bank of Chicago Bart.Miller@chi.frb.org