Major regulators are standardising liquidity risk approaches

looking at liquidity risk
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

December 19, 2019

Like many parts of the world, here in the UK, the business community is closing down for the holidays. Before I logged off, I thought it worth highlighting a couple of regulatory developments that popped up in December which are very relevant to intraday liquidity.

BCBS mainstreams Intraday Liquidity

The Basel Committee on Banking Supervision (BCBS) is the key body behind banking regulation. I sometimes describe the BCBS as like the UN for banking regulators. All the national regulatory bodies get together in Switzerland and agree global standards for how banks should be regulated. The regulators then go back home and implement these standards in their own local frameworks. Banks then have to follow these rules and compliance is tested as part of regular supervisory reviews.

On December 16th the BCBS released the consolidated “Basel Framework”. The framework brings together all of the BCBS global standards for the regulation and supervision of banks and presents them on a new section of the Basel Committee website. As the introduction says:

The Basel Framework is the full set of standards of the Basel Committee on Banking Supervision (BCBS), which is the primary global standard setter for the prudential regulation of banks. The membership of the BCBS has agreed to fully implement these standards and apply them to the internationally active banks in their jurisdictions

So all banks around the world now have to follow the Framework and the important thing from an intraday perspective is that previous guidance on intraday, known as BCBS248, has been brought into the Framework. This removes an anomaly where the intraday aspects of liquidity regulation sat slightly aside from all the other liquidity rules brought in under the Basel 3 banner. Now there can be no doubt that if a bank wants to be compliant with the global rules then it has to include intraday within its liquidity monitoring metrics. This is defined under the ‘Supervisory review process’ section of the Basel Framework (reference 50.47).

A bank’s failure to effectively manage intraday liquidity could leave it unable to meet its payment and settlement obligations on a timely basis, which could lead to liquidity dislocations that cascade quickly across many systems and institutions. As such, the bank’s management of intraday liquidity risk should be considered as a crucial part of liquidity risk management. It should also actively manage its collateral positions and have the ability to calculate all of its collateral positions.

This intraday-focused tightening of the framework is consistent with what I have been picking up from discussions around the world; more and more regulators are recognising intraday as a key liquidity risk that they need to address in their supervisory reviews.

Canada joins the party

The main Canadian regulator, OSFI, has restated a set of liquidity principles that take effect from 1st January 2020. These principles intend to ensure that the bank (or similar institution) is on top of its liquidity management and they build upon BCBS principles outlined in 2008 as a response to the financial crises.

Intraday, quite rightly, is called out as one of OSFI’s key principles…

Intraday liquidity risks have become more pronounced as the capacity of, and degree of automation in, payment and settlement systems has increased. Institutions should understand the liquidity implications of a payments system disruption and have contingency plans to manage around it

OSFI explain that the larger institutions will be expected to comply with the requirements that now form part of the Basel framework mentioned at the start of this article, but also call out that ALL institutions active in Canada (banks, all federally regulated trust and loan companies, and bank holding companies) are expected to comply with OSFI’s core principle on intraday (below). You have been warned!

OSFI Principle #12 (BCBS Principle #8): An institution should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems….all institutions are expected to comply with Principle 12 to actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis.

2019 reflections and what 2020 may bring

The lesson of 2019 seems to be that the major regulators are now standardising intraday liquidity within their liquidity risk approaches. We’ve seen the US Fed, the ECB in Europe and now OSFI in Canada join the UK PRA (and many others in places like Turkey, Saudi Arabia, Singapore, India) in formalising intraday within their guidelines and principles of supervisory reviews.

I expect that 2020 will see the impact of this being felt by firms as the regular supervisory review cycle rolls out across the industry. There will be MRAs (Matters Requiring Attention) being raised by regulators. Auditors will make similar recommendations, perhaps in advance of regulator findings. Liquidity risk professionals will be sending out warnings and we will see firms investing in Intraday improvement projects that might be long overdue.

I hope you found this a helpful summary of latest regulatory news. Happy holidays to everybody and I look forward to providing more intraday guidance in 2020. Keep checking back for new posts in 2020.

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