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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
© 2014 SAP AG. All rights reserved. 4
Banks face an information availability problem
???Data volume
is exploding
Calculation speed
is stagnating
Requirements on information availability are increasing
© 2014 SAP AG. All rights reserved. 5
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
© 2014 SAP AG. All rights reserved. 6
Agenda
Introduction
Regulatory challenges in
Liquidity Risk Management
Further derived challenges to be
managed
© 2014 SAP AG. All rights reserved. 7
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
© 2014 SAP AG. All rights reserved. 8
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.
© 2014 SAP AG. All rights reserved. 9
• 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
© 2014 SAP AG. All rights reserved. 10
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
© 2014 SAP AG. All rights reserved. 11
Cash Trapping in a non-fungible entity –
Visualization238
© 2014 SAP AG. All rights reserved. 12
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
© 2014 SAP AG. All rights reserved. 13
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
© 2014 SAP AG. All rights reserved. 14
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
© 2014 SAP AG. All rights reserved. 15
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
© 2014 SAP AG. All rights reserved. 16
Interactive aggregation and stress testing of cash
flows profiles – Visualization239
Scenario Definition Cash flow simulation
Selling strategies Take action
© 2014 SAP AG. All rights reserved. 17
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
© 2014 SAP AG. All rights reserved. 18
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
© 2014 SAP AG. All rights reserved. 19
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
© 2014 SAP AG. All rights reserved. 20
Monitoring indicators for intraday liquidity
management – Visualization
Daily maximum liquidity requirement Total payments
248
Timing of Intraday Payments Intraday Throughput
© 2014 SAP AG. All rights reserved. 21
Agenda
Introduction
Regulatory challenges in Liquidity
Risk Management
Further derived challenges to be
managed
© 2014 SAP AG. All rights reserved. 22
• 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
© 2014 SAP AG. All rights reserved. 23
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
© 2014 SAP AG. All rights reserved. 24
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
© 2014 SAP AG. All rights reserved. 25
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
© 2014 SAP AG. All rights reserved. 26
Forward LCRForward calculation differentiated into
legal entity level – Visualization
© 2014 SAP AG. All rights reserved. 27
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
© 2014 SAP AG. All rights reserved. 28
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