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Ed Royan

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Ed Royan - AxiomSL

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Technology is the key to addressing new liquidity requirements

25 February 2015  |  3487 views  |  0

Having spent much of 2014 getting to grips with new capital reporting requirements, European banks are now shifting their focus to liquidity monitoring and reporting. Over the course of 2015, they face significant changes to the way they calculate and report on their liquidity, and to the frequency of their regulatory disclosures. In order to keep up, they must ensure they have the right technology in place.

Top of the list of changes that are being introduced this year is a new version of the Liquidity Coverage Ratio (LCR), which banks must use to calculate their liquidity requirements.

Banks in Europe have been using the LCR that was defined by the Basel Committee on Banking Supervision (BCBS) as part of Basel III. However, in October, the European Banking Authority (EBA) published a new European-specific version of the LCR, which banks must now adopt as part of the Capital Requirements Directive IV (CRD IV). Similar changes are being introduced to the Net Stable Funding Ratio (NSFR), which requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities.

These changes to the LCR and NSFR mean banks will need to update the calculations and reporting templates they have been using until now. They will also need to ensure they have easy access to all of the data that must be fed into the calculations and reports.

The introduction of new LCR and NSFR calculations and reports does not mean banks can abandon the incumbent versions: instead banks that operate globally will need to maintain the CRD IV versions of the ratios for use in Europe and the BCBS versions for use elsewhere. They will also need access to the different versions of the ratios to do their group-level and entity-level calculations and reports.

 

ALMM

As well as new versions of the LCR and NSFR, banks must start filing a completely new report called Additional Liquidity Monitoring Metrics (ALMM). This has been designed to analyse the maturity of banks' positions and cashflows, and requires more granular data than before, including the concentration of funding by counterparty and the prices for various lengths of funding.

All of these liquidity reports – LCR, NSFR and ALMM – involve significant volumes of data. When Common Reporting (COREP) and Financial Reporting (FINREP) began last year, many banks found the data volumes challenging. However, even greater quantities are required for liquidity reporting because banks must analyse the inflows and outflows associated with their positions, and they must classify them according to the definitions specified for high-quality liquid assets (HQLAs). To do this, banks need technology that can scale to accommodate large data volumes or technology that offers data virtualisation capabilities.

Liquidity monitoring and reporting present particular challenges for banks whose data is distributed across multiple systems. These institutions need a platform that can quickly and accurately integrate data from the different sources. As they do this integration work, they are likely to find significant inconsistencies and gaps between the data held in different systems. Therefore it is important that a bank's platform also offers strong data normalisation functionality and that it enables the bank to implement the internal controls and plausibility checks that are needed to highlight and eliminate inconsistencies.

In order to make optimal use of their assets, it is essential that banks' technology can produce quick and accurate liquidity reports. Banks that operate across jurisdictions often face requirements to maintain certain levels of liquidity in individual countries, which they cannot include in their group-level liquidity calculations (this is called trapped liquidity). If their technology does not produce accurate reports, they may end up using more liquidity than necessary to satisfy these local requirements. Alternatively, if their entity-level calculations run too slowly, they may be late to identify surplus liquidity than can be used in the group calculations.

 

Shorter reporting cycles

Not only do banks need to run new calculations and submit new reports in 2015, they must also adapt to much shorter reporting cycles.

In January, the remittance period for LCR reporting was cut from 30 to 15 days across Europe. This is a massive change. However, CRD IV gives local regulators the option to go even further by requiring daily liquidity reporting. So far, Germany's BaFin has announced that it will exercise this option from October and the UK's Prudential Regulation Authority (PRA) has also confirmed it plans to move to daily liquidity reporting, but has yet to set a date for this.

These sharp reductions in reporting deadlines raise questions about the performance of banks' software. It is common for banks to make adjustments based on the initial outputs of their LCR calculations and to then rerun the calculations. This can be comfortably accommodated by most platforms, when banks are reporting every 30 days. However, as deadlines become tighter, these recalculations will only be possible if banks use high-performance software.

 

Intraday reporting

While keeping up with changes to CRD IV liquidity reporting, banks must also comply with new requirements from the BCBS to submit monthly reports on their management of intraday liquidity risk. These reports must include data about a bank's daily maximum intraday liquidity usage and the availability of liquidity at the start of the day and other specified times.

As part of best practice, banks should always closely monitor their intraday liquidity. However, this is the first time they have been required to report on it externally. As a result, the new requirements put pressure on banks to ensure they have clear processes and controls in place for responding to changes in liquidity. To remain compliant, banks will need technology that supports such processes and controls, and that makes it possible to quickly identify changes in liquidity. Intraday requirements also raise questions about banks' audit control and data storage functionality.

 

Pace of regulatory change

It is clear from the above that banks have a lot on their plates this year. As they set about preparing for all of these changes, arguably the greatest challenge they face is the speed at which new requirements are coming into force. This is seen most clearly in the updates the EBA issues to the XBRL taxonomy that banks must use for their CRD IV reporting: in many cases there are only a few months between the release of a new taxonomy and its implementation date.

This rapid pace of change highlights the importance of using a flexible platform that can adapt quickly. A common issue faced by banks is the fact that they cannot upgrade their platform to accommodate a regulatory change without undergoing a complete software update. Banks can prepare much more quickly for the changes I have discussed and reduce the costs involved, if they choose a platform that has separate software releases and regulatory update releases.

There is no doubt that liquidity reporting is at the top of the agenda for many banks in Europe. Those that make smart choices about their technology will be the first that get to tick liquidity off their list of things to do. 

TagsRisk & regulationWholesale banking

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Ed has more than ten years' experience working on regulatory, accounting and IT projects in the financial industry. As AxiomSL EMEA COO, he is responsible for all aspects of the company strategy in th...

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