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Ten reflections on BCBS248 intraday liquidity, direct from the Regulators

I spoke at a liquidity conference a few weeks ago where I shared a stage with representatives from the UK PRA, which is the regulator most advanced in its thinking on intraday liquidity risk. It is extremely rare for such characters to speak in such a public event, so well worth the entrance fee alone (I’ll leave it to others to comment on how much of the fee my presentation was worth…)

I thought it worth sharing my reflections on what the regulators were saying. Although they were speaking on behalf of the UK regulators, on intraday issues where they lead others tend to follow, so it’s worth close attention. I have consulted the Oracle and brought back the following words of wisdom.

1 – You need to take BCBS248 seriously. This regime has been floating around for a few years now, without really taking fire across the world. But for the UK PRA, BCBS248 is here to stay and will be built upon. That’s why they have been speaking publicly, to get the word out there. Its importance will increase over time.

2 – BCBS248 reporting is directly linked to supervisory reviews. It was clear that the UK PRA expect you to have submitted your regular BCBS248 returns, and they will use this information as the starting point of their reviews/discussions/admonishments with you. If you aren’t part of the ‘voluntary’ regime for reporting then you soon will be! Which leads us on to the next point…

3 – You need to start following more prescriptive guidelines when reporting. Back in February, the PRA issued updated guidance as too many firms had been reporting incorrectly. So, if you think reporting was just ‘fire and forget’, then be prepared for a shock.

4 – The European regulator is expecting to stir this year. The European Banking Authority (EBA) has been asking for help from the UK PRA as it moves to create a European-wide regime. Expect a standard regime and reporting format that works across Europe, and might even include the US too.

5 – You can’t keep using lack of data as an excuse for poor reporting. Some banks are claiming that their nostro agents are not giving them the data needed for intraday insight. Unfortunately for such banks, there are now enough banks who are successfully reporting to weaken this argument significantly. The regulator will hold you responsible for understanding your own positions, and if your agent isn’t capable of providing the information then ultimately you need to change your agent…

6 – The size (and cost) of your intraday buffer is linked directly to your reported intraday liquidity usage. All banks must hold a liquidity buffer specifically to cover intraday risks. The regulators were very clear that they will set this buffer based upon your reported maximum liquidity usage positions provided in your BCBS248 returns, and reminded us of a simple but compelling picture they used in their 2016 consultation on intraday liquidity risk (Pillar 2 liquidity consultation). Basically, as your ‘maximum net debit’ (the purple dotted line at the bottom of their chart below) gets bigger, so does your buffer requirement.

7 – They are testing much more than your BCBS248 returns. When the regulator turns up to conduct its liquidity review, it will be testing much more than just the accuracy of your BCBS248 reports. It wants to know you have the systems, processes, technology and governance to be right on top of your intraday liquidity usage, in real-time. Hence you need to be able to explain the ‘Why’ behind any particular position, and show the regulator you are on top of your intraday positions as they develop throughout the day. If you can’t show this level of control, then expect your buffers to go up to reflect your lack of capability. But look on the bright-side, all this extra buffer cost means you now have a cast-iron business case to go back to your steering committee and ask for money to spend on intraday improvements!

8 – The BCBS248 stress requirements are definitely part of the story. The original BCBS248 documents has some quite vague words about stress testing intraday positions. And the regulators do expect banks to follow this. All the regulator examples for stress modelling are based upon the few paragraphs in BCBS248, so you will need to follow this approach in developing your returns.

9 – But don’t expect any more help in defining the stresses to test! The regulator backs away quickly when asked to define in detail the stresses to be tested. This is a common mind-set of regulators, they don’t want to be held accountable if a firm gets its stress modelling wrong and collapses in a crisis. After all, a firm’s risk appetite and approach is something that must be defined by that firm. The regulator will mark your answers, but won’t define the question.

10 – And stress will increase your intraday buffer. The regulators confirmed something that was first publicised in Pillar 2 consultation last year [Pillar 2 liquidity consultation]. Your buffer will be set based on your average peak liquidity usage, after that average is uplifted in a stress scenario. So your buffer needs to be big enough to cope with the impact of stress(es) on that ‘average’ peak usage. Which means your intraday buffer costs get bigger yet again.

Three takeaways

What does all this mean to a bank? Three quick takeaways:

  1. The regulators are taking intraday more seriously and so will you, sooner or later.
  2. Intraday regulation and reporting is here to stay, the current BCBS248 reporting guidance is merely the starting point.
  3. It’s much more than just reporting, your ability to understand and manage your intraday risk as it develops will be tested as much as the numbers in BCBS248 returns. And if you aren’t very good at this, it will cost you real money in intraday buffer costs.

I hope you found this a helpful summary of the regulatory attitude. Keep checking back for new posts and please give your thoughts below and share any insights into anything else you might have picked up from your interactions with regulators.

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