Liquidity Risk Management - RiskLab-Madrid: Presentaciónrisklab.es/es/jornadas/2014/06 -Thomas...

Thomas Schmale, Solution Management Analytical Banking, SAP AG, 29th May 2014

Liquidity Risk Management

© 2014 SAP AG. All rights reserved. 3

Agenda

Introduction

Regulatory challenges in Liquidity

Risk Management

Further derived challenges to be

managed


Banks face an information availability problem

???Data volume

is exploding

Calculation speed

is stagnating

Requirements on information availability are increasing


A new paradigm to cope with new challenges

Real Time Transactional and Analytical Processing

Transactional

Data

Calculate&Aggregate&Visualize&Analyze

classical DB

Transactional

Processing

Analytical

Processing

Data

Warehousing

Transactional

Source DataInfo

Cubes

Analytical

Results

Calculate Aggregate Visualize

Analyze

in memory DB


Agenda

Introduction

Regulatory challenges in

Liquidity Risk Management


managed


Issue/Issuer

BCBS(Basel Committee on Banking Supervision)

BCBS 136 Liquidity Risk: Management and Supervisory Challenges

BCBS 144 Principles for Sound Liquidity Risk Management and Supervision

BCBS 155 Principles for sound stress testing practices and supervision

BCBS 157 Enhancements to the Basel II framework

BCBS 159 Guidelines for computing capital for incremental risk in the trading book

BCBS 193 Revisions to the Basel II market risk framework

BCBS 238 Basel III: International framework for liquidity risk measurement, standards and monitoring

BCBS 239 Basel III: Principles for effective risk data aggregation and risk reporting

BCBS 248 Basel III: Monitoring indicators for intraday liquidity management

CEBS/ EBA (EuropeanBanking Authority)

CEBS (CP 28) Guidelines on Liquidity Buffers

CEBS (CP 31) Guidelines on aspects of the management of concentration risk

CEBS (CP 32) Guidelines on Stress Testing

CEBS (CP36) Guidelines on Liquidity Cost Benefit Allocation

UK FSA (Financial Services Authority)/ Bank of England

CP 08/22 Strengthening liquidity Standards

CP 08/24 Stress and scenario testing

CP 09/13 Strengthening liquidity standards 2: Liquidity reporting

CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures

BIPRU Chapter 12: Liquidity standards

US FederalReserve

Dodd-Frank Wall Street Reform and Consumer Protection Act

Three Notices of Proposed Rules intended to ensure strong capital positions

Proposed Rule – LCR (board meeting)

Paper 2052a, 2052b 5G Reporting

Liquidity Risk relevant regulatory requirements


BCBS: Basel III: The Liquidity Coverage Ratio and

liquidity risk monitoring tools238

LCR

Ratio:

Level 1: Cash, Sovereign and Central Bank Debt,

…

Level 2(A, B): Sovereign and Central Bank Debt, AA- or

higher rated bonds, …

Cash Outflows: Retail deposits, Unsecured Wholesale

Funding, Repos, CCLs, Derivative Outflow

Cash Inflows: Reverse Repos, Obtained Credit Lines,

Other Inflows

Regulatory Capital

(Less) Stable Deposits, Wholesale Funding

All other Liabilities

Cash, Securities, Debt, Off-balance Sheet Exposures

Bonds, Equities, Gold, Specific Loans

All other Assets

High Quality

Liquid Assets

Net Cash

Outflow

(30 D

Horizon)

Available

Stable

Funding

(Sources)

Required

Stable

Funding

(Uses)

Liquidity

Risk

NSFR

Ratio:

• Liquidity risk portion of the BCBS reforms to strengthen global capital and

liquidity regulations with the goal of promoting a more resilient banking sector.

• Minimum standards for funding liquidity through LCR and NSFR.


• Manage HQLA in cross-border banking groups in terms of the possibilities to

include them into the consolidated group level

o BIS: BCBS 238: § 36, §171, §172

o Fed: Proposed Rule – LCR: §20 (e) (3), (4) plus §20 (f)

238

Group

Fungible

Entities

USA Retail USA CapitalCayman

IslandsItaly

Non-fungible

Entities

Canada

UniversalUK Capital Germany

Cash Trapping in a multi-national bank


Projected

Net

Outflows

Projected

Level 1

Assets

Split factor

Level 1

Assets

Net

Outflows

Level 1

Assets

Trapped

Level 1

Untrapped

Level 1

Level 2

Assets

Projected

Level 2

Assets

Capped

Level 2

Assets

Split factor

Level 2

Assets

Untrapped

Level 2

Trapped

Level 2

238

Level 1

Net

OutflowsTotal

HQLA

Level 1

Untrapped

HQLA

Level 2

Trapped

HQLA

Level 2 Level 2

Cash Trapping in a non-fungible entity


Cash Trapping in a non-fungible entity –

Visualization238


BCBS: Principles for sound stress testing practices

and supervision

• Stress testing is an important risk management tool that is used by banks as

part of their internal risk management and is promoted by supervisors.

• Stress testing alerts bank management to adverse unexpected outcomes

related to a variety of risks and provides an indication of how much capital

might be needed to absorb losses should large shocks occur

• Stress testing is a tool that supplements other risk management approaches

and measures. It plays a particularly important role in:

o providing forward-looking assessments of risk;

o overcoming limitations of models and historical data;

o supporting internal and external communication;

o feeding into capital and liquidity planning procedures;

o informing the setting of a banks’ risk tolerance; and

o facilitating the development of risk mitigation or contingency plans across a range of

stressed conditions.

155


Stress testing in terms of Liquidity Risk

Analytics:

• Forward Liquidity

Exposure

• Counterbalancing

Capacity

• LCR, NSFR

• Sensitivities

Risk Factors:

• Interest Rates

• FX

• ASF and RSF Factors

• Haircuts

• Behavioral assumptions

(runoff, drawdown, …)

• Forecasting and planning

assumptions (rollover,

new business, …)

Risk Drivers (ILAA):

• Wholesale funding risk

• Retail funding liquidity risk

• Intra-day liquidity risk

• Intra-group liquidity risk

• Cross-currency liquidity risk

• Off-balance sheet risk

• Franchise viability risk

• Marketable assets risk

• Non-marketable assets risk

• Funding concentration risk

Monitoring:

• Early Warnings

• Contingency Funding

Plans

• Limits

Stress testing

155


BCBS: Principles for effective risk data aggregation

and risk reporting

• Significant lessons learned from the financial crisis were that …

o … banks’ data architectures were inadequate to support management of financial risks.

o … banks lacked the ability to aggregate risk exposures and identify concentrations

quickly and accurately at various relevant levels.

• „Risk data aggregation“ means managing risk data to enable the bank to

measure its performance against it risk tolerance/ appetite.

• Objective is to enhance risk management and decision-making processes

• Principles have been defined, especially:

o Risk data aggregation capabilities:

o Accuracy and Integrity

o Completeness

o Timeliness

o Adaptability

o Risk reporting practices

239


Interactive aggregation and stress testing of cash

flows profiles

Visualization

Calculation

hierarchy

Analytical views

on transactional

cash flow object

SQL script or extra joins for

special logic, such as simulation

∑ ∑ g(x,y) ∑f(x,y)

max

∆

run off ∏ roll over ∫t

min h(x,y)

∑ %

Monitoring

BI Non-SAP

Key date(s)/Maturity Band/scenario(s)/portfolio/filter

What

if?

In memory

DB

Market Data, e.g.

Haircuts, FX rates

Behavioral data

… on flexibly

defined portfolios

Scenario

Select fromspecial artifacts

Generated SQL

239

MobileNative analytic UI


Interactive aggregation and stress testing of cash

flows profiles – Visualization239

Scenario Definition Cash flow simulation

Selling strategies Take action


BCBS: Monitoring indicators for intraday liquidity

management

• Sound Liquidity Risk Management: Principle 8: „… bank should actively

manage its intraday liquidity positions and risks to meet payment and

settlement obligations on a timely basis ...” A bank should have…

o ... capacity to measure expected daily gross liquidity inflows and outflows

o ... capacity to monitor intraday liquidity positions against expected activities and available

resources

o ... ability to manage and mobilise collateral as necessary to obtain intraday funds

o ... a robust capability to manage the timing of its liquidity outflows.

• Intraday Liquidity defined by the CPPS: „Fund which can be accessed during the

business day, usually to enable financial institutions to make payments in real

time.”

o Intraday Liquidity sources

o Intraday Liquidity needs

248


BCBS: Monitoring indicators for intraday liquidity

management – cont’ed

• Objective is to monitor the bank‘s usage and requirement in terms of intraday

liquidity as well as the liquidity available.

• Intrayday liquidity stress scenarios needed.

• Following indicators have been defined:

o Daily maximum liquidity requirement

o Available intraday liquidity

o Total payments

o Time-specific and other critical obligations

o Value of customer payments made on behalf of financial institution customers

o Intraday credit lines extended to financial institution customers

o Timing of intraday payments

o Intraday throughput

248


Cash & Collateral

Needed environment for monitoring indicators for

intraday liquidity management

Real time management of cash and

collateral flows and positions across:

Asset Class

Currency

Settlement Type

Depositary

Time Zone & Location

Legal Entity

Business Unit

Product

Internal

Sources

Outside

World

Analysis

Reporting

248


Monitoring indicators for intraday liquidity

management – Visualization

Daily maximum liquidity requirement Total payments

248

Timing of Intraday Payments Intraday Throughput


Agenda

Introduction

Regulatory challenges in Liquidity

Risk Management


managed


• Forecasting LCR’s of interest as banks then have a chance to

o Calculate impacts on potential changes

o Hedge against anticipated developments

• Preparation example: BIS: BCBS 238: §146: Interpretation: Expected inflows

from reverse repos may only be counted for LCR inflows if the underlying

assets to return to the counterparty of a maturing reverse repo are actually

available

o Netting on ISIN basis

• Asset Positions

• Uncapped Reverse Repo Inflows

• Capped Reverse Repo Inflows

o Simulation of Reverse Repos

How will the LCR develop over time?

Basic preparation neededForward LCR


0

50

100

150

200

250

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Non-maturity cash outflows (constant)

Contractual cash outflows with maturity date up to and including the calculation date

Contractual cash inflows with maturity date up to and including the calculation date

T0 : Regular LCRNetOutflows: 30 day time period

Forward LCRLCR view on 30 day time period has to be

shifted into the future


0

50

100

150

200

250

300

350

400

450

500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Non-maturity cash outflows (constant)

Contractual cash outflows with maturity date up to and including the calculation date

Contractual cash inflows with maturity date up to and including the calculation date

T0 + 4 : Forward LCRNetOutflows: T0 + 4 - 30 day time periodNetOutflows: T0 - T4

Forward LCRStep from T0 to Tn to be managed in terms

of cash flows, balances and positions


Legend

stable part

volatile part

converted to cash

renewed

Cash conversion of volatile part(blue part of non-orange)

0%

0% <

factorcash <

100%

scale

100%

all to cash

>100%

increase

Stability(orange

part)

0%

Nothing rolled up to T0+n

and

Factorcash x Item converted to cash

0% <

factorstable <

100%

Factorstable x Item =: “Stable Part”

rolled up to T0+n

and

Factorcash x “Volatile Part” converted to cash

100%

Everything rolled up to T0+n

and

Nothing converted to cash

Controlling forward calculation via

Scenario ParametersForward LCR


Forward LCRForward calculation differentiated into

legal entity level – Visualization


Impact of potential re-classifications to be

analyzed interactivelyRe-Classification

• Re-classifications could quickly be analyzed having

o Different rule sets for different validation regimes and time validation schemes

LCRA) Stock of high quality liquid assets (HQLA)

a) Level 1 assets

Fed Section Basel III ParagraphAmount/

market value

Cash 3.375.713.800,98

Reserve Bank balances §20 (a) (1) 50 b -

Required Minimum Central Bank Reserve -

Foreign withdrawable reserves (central bank) §20 (a) (2) 313.337.649,00

Foreign Required Minimum Central Bank Reserve -

Securities issued by U.S. Dep of Treasure §20 (a) (3) 50 b -

Securities guaranteed by U.S. Dep of Treasure §20 (a) (3) 50 b -

Securities issued by other U.S. Gov Agencies with full faith §20 (a) (4) 50 c -

Securities guaranteed by other U.S. Gov Agencies with full faith §20 (a) (4) 50 c -

Securities issued by stable non U.S. Gov Agencies with full faith (for example EZB) §20 (a) (5) 50 c -

Securities guaranteed by stable non U.S. Gov Agencies with full faith (for example EZB) §20 (a) (5) 50 c -

Securities issued by stable non U.S. Gov Agencies with full faith, not 0 % risk weight (also marketable in

time of stress)§20 (a) (6) 50 e

100.000,00

Securities guaranteed by stable non U.S. Gov Agencies with full faith, not 0 % risk weight (also marketable

in time of stress)§20 (a) (6) 50 e

-Total stock of Level 1 assets 49 3.689.151.449,98 Adjustment to stock of Level 1 assets Annex 1 -

Adjusted amount of Level 1 assets Annex 1 3.689.151.449,98

b) Level 2A assetsFed Section Basel III Paragraph Market value

Securities issued by an enterprise that is sponsored by U.S. Gov. (Investment grade below 12 CFR) §20 (b) (1) 52 (a) 6.003.694.921,00

Securities guaranteed by an enterprise that is sponsored by U.S. Gov. (Investment grade below 12 CFR) §20 (b) (1) 52 (a) 421.651.772,00

Securities issued by a aouvereign entity or a multilateral develoment bank §20 (b) (2) 52 (a) -

Securities guaranteed by a souvereign entity or a multilateral develoment bank §20 (b) (2) 52 (a) -

Securities guaranteed by a souvereign entity or a multilateral develoment bank w/ RFC §20 (b) (2) 52 (a) -Total stock of Level 2A assets 52 (a),(b) 6.425.346.693,00 Adjustment to stock of Level 2A assets Annex 1 -Adjusted amount of Level 2A assets Annex 1 6.425.346.693,00


Forward Liquidity Exposures backtested

with realized Payment Cash Flows

Reporting

Liquidity Risk Management and Liquidity Management

-4

-2

0

2

4

6

1D

3D

5D

7D

9D

11D

13D

15D

17D

19D

21D

23D

25D

27D

29D

31D

Forward Liquidity Exposure (t=0)

FLE

-4

-2

0

2

4

6

1D

3D

5D

7D

9D

11D

13D

15D

17D

19D

21D

23D

25D

27D

29D

31D

Cash Liquidity (t=10)

Cash

-4

-2

0

2

4

6

1D

3D

5D

7D

9D

11D

13D

15D

17D

19D

21D

23D

25D

27D

29D

31D

Backtest FLE (t=0) with Cash (t=10)

Cash FLE

LIQUIDITY

RISK

MANAGEMENT

LIQUIDITY

MANAGEMENT

Integrated

Liquidity and

Liquidity Risk

Management

Backtesting

Thank you!

Thomas SchmaleSolution Management

Analytical BankingIndustry Solutions

Phone +49 (0) 6227 7-69261Mobil +49 (0) 175 2215430

[email protected]://www.sap.com

Liquidity Risk Management - RiskLab-Madrid: Presentaciónrisklab.es/es/jornadas/2014/06 -Thomas...

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Transcript of Liquidity Risk Management - RiskLab-Madrid: Presentaciónrisklab.es/es/jornadas/2014/06 -Thomas...