Going beyond siloed box-ticking: Managing liquidity risk is a team game

Compliance is a pressing issue for treasurers, and a challenge is managing liquidity risk. Regulators are aligned with the Basel Committee on Banking Supervision’s (BCBS) Internal Liquidity Adequacy Assessment (ILAAP) framework. This is setting an expectation that regulated firms need to have the right liquidity in the right place, at the right time.

But for banks to be able to understand and mitigate this risk, access to real-time data is needed. This will reveal what liquidity is needed at a given moment and point towards a solution to mitigate emerging risk. Furthermore, banks need the right technology in place to gather and present the data to do this.

Base requirements set by the BCBS are set to foster a degree of accountability and ‘get up and go’ for the industry. In theory, this nudges treasurers to test the brakes before becoming the next Silicon Valley Bank.

Treasurers are increasingly challenged to build robust but flexible frameworks to deal with changing regulatory requirements and cope with unpredictable economic shifts (did someone mention trade tariffs?) But regulators don’t accept a box-ticking mentality where treasurers just show up and provide the data. They want to see a proactive outlook on regulatory risk compliance.

Banks are being urged to identify risks before they crystallize. Over time, patterns can form in the movement of liquidity and within the individual transactions that take place. Data can be harnessed to respond to any underlying risk before it escalates. Risk from under-monitored liquidity can put banks in a fragile position. When things go wrong, they go wrong fast – it pays to continually stress test.

Having gone through the thought process of thinking about these various stresses, think about what actions you can take.

Stephanie Henderson-Begg, ex regulator and now Managing Director at Red Queen Advisory thinks treasurers should continue to evolve their liquidity contingency plan into their recovery plan. With an integrated approach the whole bank can look at the options they have in a crisis more holistically.

“Historically, firms would have had a liquidity contingency plan.” Stephanie says.

“Over the years, that’s been integrated into the recovery plan. When you do your ‘severe but plausible’ stresses, the regulator will ask you to articulate what the management actions are that you might take, to try and rectify the situation. Having gone through the thought process of thinking about these various stresses, think about what actions you can take. This can start from really simple things like liquidating high quality liquid assets and reducing lending so you’ve got less outflows, or drawing down on credit lines.”

Regulators approve of banks going through the process of stress testing and then demonstrating their learnings.

From the world’s largest banks to local credit unions, understanding and interpreting regulation is important. But at both ends of the scale, execution can be difficult because it’s hard to get the right data – and get it fast.

Most banks work across multiple and often disparate systems which can provide a relentless challenge – especially when running regular stress tests. Larger banks face challenges of legacy technology and sheer data volume. And even though smaller enterprises deal with comparatively less data, they lack the resources, technology and processes to overcome data-heavy tasks.

The pressure on treasury departments in smaller banks is particularly felt. Believe it or not, treasury departments do value the commercial element too – they are constantly balancing regulatory requirements on the one hand and looking at optimising profitability on the other.

In summary, treasurers can better approach liquidity risk management in two ways:

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By including multiple business functions in their risk management process to get a more holistic view.

But to achieve these things treasurers would benefit from access to these two things:

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…and smart technology to do the heavy lifting.

With robust frameworks and working practices in place, banks can be in good stead to please the regulator and benefit from a range of technologies that unlock valuable, actionable data. Regulators approve of proactive risk management. Treasurers can respond to this by investing in the right areas to improve their frameworks, and in doing so, they could stand a chance of realizing some powerful insights and efficiencies.