01/14/1001/14/10

Evolving Liquidity Evolving Liquidity IssuesIssues

Presentation by Presentation by R.S.NegiR.S.Negi

Sr.ManagerSr.ManagerRisk Management departmentRisk Management department

BANK OF BARODABANK OF BARODACORPORATE CENTRECORPORATE CENTRE

MUMBAIMUMBAI

01/14/1001/14/10

OutlineOutline

FSA-Strengthening Liquidity StandardsFSA-Strengthening Liquidity Standards Reserve Bank of New Zealand- Liquidity Reserve Bank of New Zealand- Liquidity

Policy-June-2009Policy-June-2009 Lord Turner Report-March 2009Lord Turner Report-March 2009 David walker Review- July 2009David walker Review- July 2009 BCBS principles for sound Liquidity Risk BCBS principles for sound Liquidity Risk

management and Supervision-Sep-2008management and Supervision-Sep-2008

01/14/1001/14/10

IntroductionIntroduction FSA has published a consultation paper FSA has published a consultation paper

08/22 in December 200808/22 in December 2008 It aims to develop new framework for Liquidity It aims to develop new framework for Liquidity

Risk management.Risk management. Three approaches to Liquidity managementThree approaches to Liquidity management FSA has published a consultation paper FSA has published a consultation paper

09/13 in April 2009 on Liquidity Reporting 09/13 in April 2009 on Liquidity Reporting FSA has come out with a third consultation FSA has come out with a third consultation

paper 09/14 of June 2009 on liquidity paper 09/14 of June 2009 on liquidity transitional measurestransitional measures

01/14/1001/14/10

Three ApproachesThree Approaches

Self SufficiencySelf Sufficiency

Whole Firm waiver SchemeWhole Firm waiver Scheme

Intra Group Firm Waiver schemeIntra Group Firm Waiver scheme

01/14/1001/14/10

Self SuffieciencySelf Suffieciency No Dependency on Parent or GroupNo Dependency on Parent or Group Maintains all time Liquidity Resources sufficient Maintains all time Liquidity Resources sufficient

to maintain severe stressto maintain severe stress Sufficient marketable or otherwise realizable Sufficient marketable or otherwise realizable

assetsassets Liquid Assets of appropriate maturity taking Liquid Assets of appropriate maturity taking

account of expected timing of outflowsaccount of expected timing of outflows Able to generate funds from liquid assets in a Able to generate funds from liquid assets in a

timely mannertimely manner Able to generate unsecured funding in a timely Able to generate unsecured funding in a timely

manner.manner.

01/14/1001/14/10

Whole Firm waiver Whole Firm waiver SchemeScheme

FSA will expect to be satisfied FSA will expect to be satisfied withwith::

Liquidity regime of home state regulator Liquidity regime of home state regulator is more onerous than FSAis more onerous than FSA

Home state regulator follows “Principles Home state regulator follows “Principles for Sound Liquidity Management and for Sound Liquidity Management and Supervision” of BCBS dated Sep,2008Supervision” of BCBS dated Sep,2008

01/14/1001/14/10

Whole Firm waiver Whole Firm waiver SchemeScheme Home state regulator does not prefer resident Home state regulator does not prefer resident

depositor than those in UK on the winding up of depositor than those in UK on the winding up of the firmthe firm

Legal constraints imposed by home state Legal constraints imposed by home state regulator or any third country competent regulator or any third country competent authority on provision of liquidity for UK branchauthority on provision of liquidity for UK branch

Home state regulator will notify the FSA of any Home state regulator will notify the FSA of any material or persistent breaches by firm of its material or persistent breaches by firm of its liquidity rulesliquidity rules

01/14/1001/14/10

Whole Firm waiver Whole Firm waiver SchemeScheme Home state regulator Home state regulator 2.2. is satisfied as to the size and quality of is satisfied as to the size and quality of

its liquid asset buffer and the size and its liquid asset buffer and the size and quality of any liquidity resources that quality of any liquidity resources that are held in UKare held in UK

3.3. Does not object to any undertaking by Does not object to any undertaking by frim to FSAfrim to FSA

4.4. Gives due regard to the views of FSAGives due regard to the views of FSA

01/14/1001/14/10

Whole Firm waiver Whole Firm waiver SchemeScheme Firm’s agreement with FSAFirm’s agreement with FSA

2.2. It will make available liquidity resources at all It will make available liquidity resources at all times to UK branchtimes to UK branch

3.3. Will make available to FSA information on an Will make available to FSA information on an appropriate format on firm wide liquidityappropriate format on firm wide liquidity

4.4. Notify the FSA as it notifies to home state Notify the FSA as it notifies to home state regulator concerning the liquidity positionsregulator concerning the liquidity positions

01/14/1001/14/10

Intra Group Firm Intra Group Firm Waiver schemeWaiver scheme All conditions as in Whole Firm waiver All conditions as in Whole Firm waiver

SchemeScheme FSA may also consider application for FSA may also consider application for

support from other group entities other support from other group entities other than parent than parent

01/14/1001/14/10

Individual Liquidity Individual Liquidity adequacy Standardsadequacy Standards Individual Liquidity Adequacy Individual Liquidity Adequacy

Assessment (ILAA)Assessment (ILAA)

Supervisory Liquidity Review Process Supervisory Liquidity Review Process (SLRP) (SLRP)

01/14/1001/14/10

ILAAILAA

At least annually or more frequentlyAt least annually or more frequently Stress Testing-Short term (2 weeks), Stress Testing-Short term (2 weeks),

Long term, Idiosyncratic Stress as well Long term, Idiosyncratic Stress as well as Market wideas Market wide

01/14/1001/14/10

SLRPSLRP

ILAA review by FSAILAA review by FSA Individual Liquidity Guidance by FSAIndividual Liquidity Guidance by FSA Advising amount and quality of liquidity Advising amount and quality of liquidity

resources appropriate for the firmresources appropriate for the firm Appropriate funding profile for the firmAppropriate funding profile for the firm

01/14/1001/14/10

Key Drivers of Key Drivers of Liquidity Risk Liquidity Risk LRD-LRD-Explained.pptExplained.ppt

Wholesale funding riskWholesale funding risk Retail funding riskRetail funding risk Intraday liquidity riskIntraday liquidity risk Intra-group liquidity riskIntra-group liquidity risk Cross-currency liquidity riskCross-currency liquidity risk Off-balance sheet liquidity riskOff-balance sheet liquidity risk Franchise viability liquidity riskFranchise viability liquidity risk Marketable asset riskMarketable asset risk Non-marketable asset riskNon-marketable asset risk Funding diversification riskFunding diversification risk

01/14/1001/14/10

Liquid assets bufferLiquid assets buffer High quality government debt securitiesHigh quality government debt securities Securities issued by:Securities issued by:3.3. African Development BankAfrican Development Bank4.4. Asian Development BankAsian Development Bank5.5. Council of Europe Social Development Council of Europe Social Development

FundFund6.6. European Atomic Energy communityEuropean Atomic Energy community7.7. European Bank for Reconstruction & European Bank for Reconstruction &

Development Development

01/14/1001/14/10

Liquid assets bufferLiquid assets buffer

European CommunityEuropean Community European Coal & Steel CommunityEuropean Coal & Steel Community European Investment BankEuropean Investment Bank Inter-American Development BankInter-American Development Bank International Bank for Reconstruction & International Bank for Reconstruction &

Development/World BankDevelopment/World Bank International Finance Corporation International Finance Corporation Nordic investment bankNordic investment bank

01/14/1001/14/10

Liquid assets bufferLiquid assets buffer Reserve (Sight Deposit) with Central Reserve (Sight Deposit) with Central

Bank of an EEA state, USA, Canada, Bank of an EEA state, USA, Canada, Japan and Switzerland. Country of the Japan and Switzerland. Country of the Central Bank should have at least two Central Bank should have at least two of the following credit assessment:of the following credit assessment:

2.2. Aa3 or higher by Moody’sAa3 or higher by Moody’s

3.3. AA-or higher by FitchAA-or higher by Fitch

4.4. AA-or higher by Standard & PoorAA-or higher by Standard & Poor

01/14/1001/14/10

Liquid assets bufferLiquid assets buffer

Count Securities which are Count Securities which are unencumbered, has legal title, and which unencumbered, has legal title, and which a firm realizes on a regular basisa firm realizes on a regular basis

FSA expects a firm to realize a FSA expects a firm to realize a proportion of the assets in its buffer proportion of the assets in its buffer periodically (either by repo or outright periodically (either by repo or outright sale) to test its capacity to realise.sale) to test its capacity to realise.

01/14/1001/14/10

Implications for firmsImplications for firms

Less reliance on short-term wholesale funding Less reliance on short-term wholesale funding • Greater incentives for firms to attract a higher Greater incentives for firms to attract a higher

proportion of retail time deposits;proportion of retail time deposits; A higher amount and quality of stocks of liquid A higher amount and quality of stocks of liquid

assets assets • A check on unsustainable expansion of bank A check on unsustainable expansion of bank

lending during favorable economic times.lending during favorable economic times.

01/14/1001/14/10

Current position of UK Current position of UK territory (31.03.2009)territory (31.03.2009)

2738766500174342484472Total

-466

-62

61

-

281

404

118

286

-

3M-6M

-517

-51

59

21

94

225

-

225

-

6M -12M

287120146--Investments

Inflows123654120010317Advances

455333122--Capital Funds

1010855173236Customer Deposits

1069--316635Inter Bank/Branch Deposit

2534418127489871Total

-144

373

154

12M -36M

+204

348

105

>36M

-

204

1215

Total

-404-399Cumulative Mismatch

-5-399Mismatch

381455Placements

Outflows

1M - 3M

Upto 1M

Particulars  

01/14/1001/14/10

Currency Mismatch as Currency Mismatch as on 31.03.2009on 31.03.2009

27726Investment

205--Long term borrowing

1387195Advances

784463Customer Deposit

USDGBP Composition (%)

01/14/1001/14/10

Resource & Resource & DeploymentDeployment

31.03.2009Particulars31.03.2009Particulars

1,215Placements301Borrowing

358Non India based1,010Inter-bank

274 India based425Indian Corporates

632GSC (of which)140Africa based

350Trade Finance240

225

Retail

Corporate

254Local Advances465Local Customers (of which)

1,236Advances (of which)2,040 Deposits (of which)

£ going to £ coming from

01/14/1001/14/10

Liquid AssetsLiquid Assetsas specified for simplified ILAS firmas specified for simplified ILAS firm

+25% of un-drawn commitments

+5% of all retail deposits due within 90 bussiness days

Peak cumulative contractual net outflow over 90 business days (excluding retail deposits and inflows from TB)

>Short term Sterling treasury bills

01/14/1001/14/10

Cost ImplicationCost Implication

£ 166003 Average ongoing costs (per annum)-crisis time reporting

£ 144880Average ongoing costs (per annum)-business as usual

£ 542158 Average one-off costs (solo branch reporting)

Cost Description

01/14/1001/14/10

ReportsReports FSA047: EMR Daily FlowsFSA047: EMR Daily Flows FSA048: Enhanced Mismatch Report FSA048: Enhanced Mismatch Report

(EMR) – Standard(EMR) – Standard FSA050: Marketable AssetsFSA050: Marketable Assets FSA051: Funding ConcentrationFSA051: Funding Concentration FSA052:FSA052: Pricing DataPricing Data FSA053: Retail and Corporate FundingFSA053: Retail and Corporate Funding FSA054: Currency AnalysisFSA054: Currency Analysis ReportsReports

01/14/1001/14/10

Schedule of Schedule of implementationimplementation

ScheduleSchedule

01/14/1001/14/10

Reserve Bank of New Reserve Bank of New ZealandZealand

Liquidity PolicyLiquidity Policy

June-2009June-2009

01/14/1001/14/10

Main featuresMain features Guidelines have been built upon the BCBS’s Guidelines have been built upon the BCBS’s

‘Principles for Sound liquidity management and ‘Principles for Sound liquidity management and supervision’ Sept 08supervision’ Sept 08

Silent on liquidity transfer across group/firmSilent on liquidity transfer across group/firm Less stringent than FSA guidelines in UK.Less stringent than FSA guidelines in UK. Liquid Asset buffer requirement less stringent than Liquid Asset buffer requirement less stringent than

FSA in UKFSA in UK One week mismatch ratio------Minimum zero One week mismatch ratio------Minimum zero

(Mismatch/Total funding)(Mismatch/Total funding) One month mismatch ratio-----Minimum zero One month mismatch ratio-----Minimum zero

(Mismatch/Total funding)(Mismatch/Total funding) One year Core funding ratio----Standard minimum One year Core funding ratio----Standard minimum

=75% (core funding/total loans and advances)=75% (core funding/total loans and advances) Reports for the liquidity reports are yet to be finalized Reports for the liquidity reports are yet to be finalized

by the Reserve Bank of New-Zeelandby the Reserve Bank of New-Zeeland

01/14/1001/14/10

Mismatch RatioMismatch Ratio

Mismatch RatioMismatch Ratio

=100*(Mismatch/Total Funding)=100*(Mismatch/Total Funding)

01/14/1001/14/10

One-week mismatch One-week mismatch ratioratio---------------------Minimum ---------------------Minimum = 0= 0One-week mismatch dollar amount =

primary liquid assets after accounting for haircuts plus contractual inflows due within one week plus 75 per cent of undrawn committed lines granted to the bank

available within one week, up to a maximum of 3 per cent of total funding from any one provider and a maximum of 9 per cent of total funding from all providers together

minus interest payments and payments on derivative contracts contractually due within one week

minus 100 per cent of wholesale funding withdrawable at sight or with residual contractual term within one week

minus 10 per cent of retail funding withdrawable at sight or with residual contractual term within one week

minus 15 per cent of the undrawn balance of committed lines, other than revolving retail facilities, granted by the bank drawable within one week

01/14/1001/14/10

One-month mismatch One-month mismatch ratioratio--------------------------------------------Minimum = 0Minimum = 0One-month mismatch dollar amount =

primary liquid assets after accounting for haircuts plus secondary liquid assets after accounting for haircuts plus contractual inflows due within one month plus 75 per cent of undrawn committed lines granted to the bank

available within one month, up to a maximum of 3 per cent of total funding from any one provider and a maximum of 9 per cent of total funding from all providers together

minus interest payments and payments on derivative contracts contractually due within one month

minus 100 per cent of wholesale funding withdrawable at sight or with residual contractual term within one month

minus 15 per cent of retail funding withdrawable at sight or with residual contractual term within one month

minus 15 per cent of the undrawn balance of committed lines, other than revolving retail facilities, granted by the bank drawable within one month

01/14/1001/14/10

Total FundingTotal Funding

Total Funding = Wholesale + retail fundingTotal Funding = Wholesale + retail funding

Retail funding is defined as:

(a) deposits/debt securities held by natural persons; and

(b) deposits/debt securities held by small and medium-sized bodies corporate and Crown and government organisations, excluding financial institutions.

Wholesale funding is defined as :

(a) all other securities issued by the bank.

01/14/1001/14/10

Total FundingTotal Funding A Crown or government organisation is small or

medium-sized if its total assets held at the registered bank or at the banking group (as applicable, following the scope of consolidation being used for the calculation) were not more than NZ$1,000,000 on the most recent date at which the bank assessed the categorisation of that organisation.

A body corporate other than a Crown or government organisation is small or medium-sized if its total assets, plus the total assets of its associates and affiliates, held at the registered bank or at the banking group (as applicable, following the scope of consolidation being used for the calculation) were not more than NZ$1,000,000 on the most recent date at which the bank assessed the categorisation of that body corporate.

01/14/1001/14/10

One year Core Funding One year Core Funding ratio-------------Minimum = ratio-------------Minimum = 75%75%

One year core funding dollar amount = wholesale funding with residual maturity longer

than one year, including subordinated debt and related funding

plus retail funding with residual maturity longer than one year

plus 90 per cent of retail funding withdrawable at sight or with residual maturity less than or equal to one year

plus Tier 1 capital

01/14/1001/14/10

One year Core Funding One year Core Funding ratio-------------Minimum = ratio-------------Minimum = 75%75%

Core funding ratio = 100 x (One year core funding dollar amount / total loans and advances)

Liquid Assets

01/14/1001/14/10

Reporting requirementReporting requirement

Consultation Paper-New Consultation Paper-New zealand.pdfzealand.pdf

01/14/1001/14/10

Lord Turner ReviewLord Turner Review

A regulatory response to the A regulatory response to the global banking crisisglobal banking crisis

March 2009March 2009

01/14/1001/14/10

What went wrong ?What went wrong ?

The growth of the financial sectorThe growth of the financial sector Increasing leverageIncreasing leverage Changing forms of maturity Changing forms of maturity

transformationtransformation Misplaced reliance on sophisticated Misplaced reliance on sophisticated

mathsmaths Hard-wired procyclicalityHard-wired procyclicality

01/14/1001/14/10

What to do ?What to do ?

Overall capital in the global banking Overall capital in the global banking system should be increased above system should be increased above existing Basel rulesexisting Basel rules

Capital requirement to be significantly Capital requirement to be significantly increased for trading book activitesincreased for trading book activites

Avoid procyclicalityAvoid procyclicality Use through the cycle probabilities of Use through the cycle probabilities of

default rather than point in timedefault rather than point in time

01/14/1001/14/10

What to do ?What to do ?

Introduce counter cyclical capital adequacy Introduce counter cyclical capital adequacy regimeregime

Example: Example: Bank of SpainBank of Spain Economic Cycle Reserve to be createdEconomic Cycle Reserve to be created Maximum Gross Leverage Ratio to be Maximum Gross Leverage Ratio to be

introducedintroduced Liquidity regulation and supervision should be Liquidity regulation and supervision should be

recognised as of equal importance to capital recognised as of equal importance to capital regulation regulation

01/14/1001/14/10

What to do ?What to do ?

More intense and dedicated supervision More intense and dedicated supervision of individual banks’ liquidity positionsof individual banks’ liquidity positions

Introduction of ‘Core Funding Ratio’Introduction of ‘Core Funding Ratio’ Retail deposit insurance should be Retail deposit insurance should be

sufficiently generoussufficiently generous Credit rating agencies to be subject to Credit rating agencies to be subject to

registration and supervisionregistration and supervision Independent Risk management FunctionIndependent Risk management Function

01/14/1001/14/10

What to do ?What to do ?

The Skill level and time commitment The Skill level and time commitment required for non-executive directors of required for non-executive directors of large complex bankslarge complex banks

Establishment and effective operation of Establishment and effective operation of colleges of supervisors for the largest colleges of supervisors for the largest complex and cross border financial complex and cross border financial institutions.institutions.

01/14/1001/14/10

David Walker ReviewDavid Walker Review

Currently Senior Advisor – Morgan StanleyCurrently Senior Advisor – Morgan Stanley Earlier RolesEarlier Roles

3.3. Chairman – Morgan Stanley Intnl.Chairman – Morgan Stanley Intnl.

4.4. Assistant Secretary of Treasury, UKAssistant Secretary of Treasury, UK

5.5. Chairman of Securities and Investment BankChairman of Securities and Investment Bank

6.6. Chairman of Lloyds bank, London investment Chairman of Lloyds bank, London investment Bankers AssociationBankers Association

01/14/1001/14/10

Walker ReviewWalker Review

Total of 39 recommendationTotal of 39 recommendation Board size, composition and qualification (5)Board size, composition and qualification (5) Functioning of the Board and Evaluation of Functioning of the Board and Evaluation of

performance (8)performance (8) The role of institutional shareholders: The role of institutional shareholders:

communication and engagement (9)communication and engagement (9) Governance of Risk (5)Governance of Risk (5) Remuneration (12)Remuneration (12)

01/14/1001/14/10

Walker ReviewWalker Review

Report deals with Corporate GovernanceReport deals with Corporate Governance Weakness in Risk Management, Board Quality Weakness in Risk Management, Board Quality

and Practice, Control of Remuneration and Practice, Control of Remuneration Principle deficiencies in Board related to much Principle deficiencies in Board related to much

more to patterns of behavior than to more to patterns of behavior than to OrganizationOrganization

Board level engagement in the high level risk Board level engagement in the high level risk process to be increasedprocess to be increased

01/14/1001/14/10

Walker ReviewWalker Review

Full independence in the Group Risk Full independence in the Group Risk Management functionManagement function

NEDs to give more time commitment NEDs to give more time commitment (Minimum 30 to 36 days)(Minimum 30 to 36 days)