New Regulations to Drive Additional Investment in Liquidity Management

Sybase, an SAP company, and Aite Group have published a report examining the liquidity risk management (LRM) challenges that banks and financial institutions must face in the post-financial crisis era.

“Liquidity risk management has become a high-priority issue for banks. It is the most significant of all business risks in that the inability to fund a position imminently can lead directly to insolvency,” said John Jay, senior research analyst, Aite Group. “Financial institutions must adopt a comprehensive approach reflecting the significance of LRM to the organisation’s success.”

Global regulatory bodies have released a number of recent and comprehensive policy statements, proposals, and guidelines for financial institutions associated with LRM seeking to minimise liquidity risk. Banks and money managers will need to comply with business and compliance realities. In addition to regulatory issues, a dominant industry pain point is around legacy silos. Liquidity risk data sources span an entire enterprise and many banks use an inefficient spreadsheet-based LRM approach drawing from multiple data sources.

“The single most consistent and significant challenge identified by practitioners is that of gathering information from disparate systems,” said Sinan Baskan, senior director of business development, financial services, Sybase. “Lack of timely and accurate visibility into all components influencing bank liquidity hinders a financial institution’s ability to manage liquidity risk – for many large banks, the number of systems containing liquidity information is upwards of 25.”

Liquidity risks go beyond funding a loan or a security purchase. Complex derivatives, illiquid securities, ongoing transactions-based business relationships, volatile funding markets, as well as regulatory and investor scrutiny demand that financial firms incorporate liquidity risk-related data and process in their risk management scheme. Strengthening the LRM infrastructure will fortify a firm’s overall risk and compliance framework.

Developing a robust LRM infrastructure has become a necessity to most financial institutions, and the heavy hand of regulation may force organisations to invest in LRM technologies in the not-so-distant future. To address the pain points listed above, the report recommends the following approach:

  • Ensure LRM governance takes the non-contractual aspects of liquidity risk into full account. This will assure industry and regulators that a comprehensive infrastructure is in place to minimise liquidity risk.
  • Review the data management environment to identify shortcomings. Manage liquidity risk not only within the respective functional areas, but across the entire company as well.
  • Strengthen integration of counterparty- and security-level data into LRM infrastructure. Incorporating real-time data can alert to changing funding costs, counterparty risks, balance sheets obligations and quality of liquidity of capital markets. By measuring and monitoring contingent risks explicitly within a balance sheet, internal and external stakeholders will gain a comprehensive view of liquidity risks.
  • Conduct reasonable but high-hurdle stress testing. Addressing high-level as well as granular views of firm-wide stress testing inputs will let investors and regulators feel comfortable about a firm setting a proper bar for solid LRM.
  • View disclosure as source of strength. By disclosing a robust LRM process and infrastructure, investors, clients, regulators and management will have greater confidence that a financial institution has the proper tools in place to minimise any liquidity stresses.
  • Decide whether to build or buy. Each organisation should examine both the capabilities of its own internal development resources as well as vendor solutions in the market.


Related reading