Risk silos foiling liquidity and capital management efforts
If liquidity is the life blood of a bank, more attention needs to be paid to the symptoms and prevention of the heart disease that is liquidity risk, say the FSA’s Colin Lawrence and other senior risk officials. June 08, 2011 | Peter HoflichAs seen in the dark days of the global economic crisis, when banks with high capital levels still failed through the rapid depletion of their liquidity, the way forward requires a greater emphasis on effective asset liability management including taking into account the dynamics of the balance sheet. From the regulators’ point of view of, understanding what will happen to a bank when its liquidity is under stress, forecasting their ability to raise cash, dealing with cross-border issues, and quickly dealing with a resolution plan have now become part of banking 101. The issue of banks’ failings in proving their long-term sustainability through the implementation of robust liquidity and capital management is particularly thorny in the UK, where Colin Lawrence was hired to set up a prudential risk management division at the FSA in 2008, and serves as its director. “I’ve just published a letter to the industry for asset liability committees, saying ‘you’re inept, you’re incompetent, you’re looking backwards, even after the crisis—you’ve got to start looking forward at planning your liquidity’,” explained Lawrence at the Risk and Regulation Conference at The Asian Banker Summit, held on April 7th and 8th in Hong Kong. “Funding is absolutely critical for banks, it’s like the blood supply for your body; yet even to this day, liquidity risk isn’t properly priced and funding diversification is something brand new to the industry.” Going forward, it is important for liquidity to have a stronger role in business strategy; not treated as a back office function, but part of strategic risk management and the bank’s business. Banks will need capital plans, business plans, and an understanding of how their portfolios will evolve, which includes a forward-looking view on sources of funding and a solid definition of liquidity risk appetite over any given horizon. Lawrence notes that in the UK, the regulator is looking m... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Asian Banker Summit 2011, Risk and Regulationsummit 2011,Risk and Regulation, Asian Banker Summit 2011,Risk and Regulation, Keywords:FSA UK, Liquidity, CITIC Bank International, Oracle Financial Services FSA UK, liquidity, CITIC Bank International, Oracle Financial Services
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