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The Regulators restart the intraday liquidity race – 12 talking points

I’ve written on numerous occasions about how global regulators are gently manipulating banks towards a world of intraday control, through the supervisory process and increasing levels of reporting requirements. The UK PRA has just defined the next stage of the race and this will gradually impact banks all over the world. The PRA has finalised its guidance on intraday supervision, after a lengthy consultation period that started almost two years ago.

Intraday liquidity risk has been a focus for regulators since the financial crashes of 2007/8. The UK PRA, part of the Bank of England, has long been seen the prime mover in this. It was the PRA (and its predecessor, the FSA) that was behind the Basel committee’s BCBS248 monitoring regime and it continues to publicly press an intraday improvement agenda. (The Federal Reserve, although much less public, also has a strong focus on intraday, as banks subjected to liquidity reviews quickly find out).

If you are part of a bank that has any links at all to the UK, then you will be impacted soon enough. If you are outside this sphere of influence then you shouldn’t be complacent, as there is a lot of peer learning in the regulator community, and your local regulator will follow at some point in the future.

I’ve spotted a dozen points of interest from the final guidance and explain them in the rest of this article.

1 – This is official now

When regulators go into ‘consultation mode’ it can take a long time for policies to be finalised. In this case, the consultation process began in May 2016 and it was late February 2018 before the process finished. But all that is history and now there is an official “Statement of Policy” on how the regulator will assess intraday liquidity risks as part of its supervisory regime. All relevant firms need to comply from this point on. The key SOP can be found here – Pillar 2 SOP.

2 – This is Pillar 2 and adds to LCR/NSFR

The intraday regime is wrapped up within Pillar 2 Liquidity – a range of additional liquidity items that the PRA considers to be vital additions to Pillar 1 Liquidity (Pillar 1 is where LCR & NSFR metrics are used to set liquidity buffers which underpin the stability of banks). In many cases this forces a bank to increase its liquidity buffers, with a corresponding increase in the cost of being in business.

3 – Intraday is a key part of Pillar 2

In addition to a catch-all category, there are three topics given standalone attention in the Pillar 2 SOP. Intraday is one of these key three topics, which shows the importance of intraday to the PRA. Intraday is not going away as an issue, it needs to be baked into the operations and funding arrangements for banks.

4 – Everyone is in scope

The SOP is very clear, and this is backed up in dialogue with the PRA, that all the PRA-regulated firms are within the scope of the intraday regime. There is recognition that some firms are more exposed than others (due to size and types of activity they pursue) but every institution must consider intraday risks and act accordingly. Many more supervisors are being trained in intraday matters and firms should expect attention on intraday from this point on. There is no hiding place!

5 – It is about so much more than BCBS248

The BCBS248 monitoring regime was only ever a starting point. Effectively it forced banks to report ‘after the event’ on their peak uses of liquidity. The Pillar 2 SOP hardly mentions BCBS248, it’s only mentioned once in a footnote! This is because the PRA has moved on substantially and wants to know the bank has real-time Intraday Control. The metrics in BCBS248 are a building block to this, but much more needs to be done. The PRA is not alone in this. The Fed has no public requirement for banks to provide BCBS248 returns, yet puts its banks through some of the most rigorous intraday reviews in the world.

6 – It’s averages not maximums

The PRA has moved the debate on from focusing on maximum peaks & troughs in liquidity usage. It wants you to understand your average positions (so you can ignore the exceptional days) and has a new concept of maximum net debits in a day. The chart below, taken from the Pillar 2 SOP, illustrates this, 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 test more than just the peaks

The PRA is very explicit that a range of items contribute to its view on your risk (and hence how large it will set your expensive intraday liquidity buffers). These items are:

  1. Your average maximum net debit
  2. Your stress modelling
  3. The quality of your operations, processes, technology & policy
  4. The market you operate in

8 – Systems are incredibly important

For the first time, the regulator has said explicitly that it will consider how well you manage the intraday process when assessing your risks. It will look at how you operate, who is involved, how you use technology and how ‘real-time’ your monitoring/management of intraday really is. It will apply a specific uplift to your risk positions and this gets bigger and bigger the more nervous you make the supervisor!

9 – You won’t get much help defining stresses

You have to work out which intraday stresses to model, how to model them and prove that the modelling uses the same data / infrastructure used in real life operations. The regulator won’t direct firms in what to do here, supervisors will sit back and observe. They need to get comfortable that the firm is able to assess its stresses sufficiently and make appropriate risk provision. As with the systems point, how well you perform stress modelling has a direct impact on how high your liquidity buffers will be set.

10 – You can’t only reduce your peaks

The PRA makes a rather surprising comment in the detail of the SOP:

“A firm should not assume that a reduction in the maximum net debit profile will necessarily lead to a reduction in the PRA’s assessment of intraday liquidity risk”

This is there to make explicit just how important it considers the way you manage your intraday ecosystem to be. The PRA does expect that peaks will reduce, but it wants this to be as a result of great insight, secure technology, sharp management and stress-based analysis of risks. Ultimately, it wants to know you can sustain a programme of intraday improvement and that, in between scheduled regulatory reviews, intraday profiles will be constantly under control.

11 – No fungibility

A bit technical this point, but the PRA wants to assess each ‘system’ separately. What this boils down to is that you can’t expect to be able to offset a long position in one currency against a short position in another. So those banks who typically hold their assets in a ‘safe’ currency (e.g. USD) still have to work out how they cover for intraday overdrafts elsewhere in the world. If you want to use the longs to cover off shorts cross-currency then be prepared for an argument. You will have to prove your ability to move money quickly at any time of day (or night!) especially in a time of stress.

12 – No double duty

Another technical point and one that I often see being argued against by banks. Essentially the PRA is saying that you can’t use part of the ‘long-term buffer’ (e.g. that held for LCR purposes) as your intraday buffer. The argument is that the same asset can’t be used for two things at the same time – after all Lehmans collapsed when they lost their credit lines and tried to use their “assets used to cover a run on the bank” as day to day collateral.

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