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

Meet the Webinar presenters… Chris Blake Fitz Drummond Brandon Davies Senior Manager Liquidity Director, Funds Board Director, & Risk Transfer Pricing, Obillex Limited, HSBC Treasury Former Head of Deutsche Bank Market Risk Barclays

Liquidity • 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 Coverage Ratio Comprehensive Resource Management Under Stress Balance Sheet and Limit Setting & Liquidity Planning Monitoring Scenario Analysis Optimal Granularity High Quality Liquid Asset Buffer >= 100% Outflows – Inflows [Max 0.75*Outflows] Reporting Funds Transfer Pricing Frequency and Cost of Liquidity Granularity

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

Relationship between regulatory and internal models Committed Facilities Identify Gaps Derivatives MTM Deposits Roll-off Liquidity Volatility Internal Stress Challenge Internal Coverage Etc Test Model Ratio Optimise FTP & Controls q What is your constraining measure? Potential Impact of LCR: Additional Buffers q What is the basis of FTP Potential Impact of NSFR: Extended duration q What is the basis of limits framework and planning?

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 You may also be interested in… 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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