Liquidity Risk

Our think-tank friends at JWG-IT organised a great event yesterday, with several of the top banks coming together to share their thoughts on what is currently causing them the most pain in implementing the FSA liquidity risk requirements (see FSA Consultative Paper CP08/22 for background).

A few points I took from the meeting:

• FSA is moving from a "principles" based approach to regulation to "outcomes" on to "proof of judgement" as the basis for assessing financial institutions
• What liquidity stress tests the FSA wants the financial institutions to perform is still far from clear
• The above uncertainty is not helping when combined with an implementation deadline of this October
• Whether liquidity risk must be managed at the branch or group level is a key unanswered question which has enormous implementation implications
• The data requirements are enormous and since a group-wide issue requirements greater central access to data across all departments - unlike traditional market risk which is currently more siloed within each business division
• The granularity of data required (down to transactions, detailed cashflows for complex derivatives) is very challenging
• Management of intraday liquidity requires real-time cash transaction reporting which is currently not being done/is difficult to do
• "Ownership" of liquidity risk implementation typically resides within a bank's treasury function but awareness, ownership and involvement of all departments (e.g. market risk) could be greatly  improved

A lot more interesting issues and detail on this meeting plus survey results will be available from JWG-IT soon (see their liquidity risk site)