This document discusses the challenges that Basel III regulations present for liquidity management and reporting. It outlines the goals of more stringent liquidity requirements in Basel III, and why early and granular analysis of balance sheet, funding sources, collateral and more will be needed. It also discusses how to turn liquidity reporting into a valuable business asset that supports both regulatory compliance and day-to-day decision making. A case study further illustrates these points by showing how one organization addressed their liquidity reporting challenges through a new centralized database infrastructure.

1. Liquidity is the new Capital
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2. Agenda
• The goals of Basel III
• Why is Basel III such a challenge?
• Historical positioning for Liquidity Reporting
• Why Basel III is a catalyst for change
• How to make Liquidity Reporting a valuable Business Asset
• What are the success factors?
• How do you move forward?
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3. Why is Basel III such a challenge?
• Basel III sets out new requirements for • Such analysis must take place in an
Liquidity Processes and Management: environment where:
– Target Ratio’s will require significant – Demand for quality liquid assets is increasing
increases in holdings of Liquid Assets. hence the price of liquidity is increasing.
The expectation is that this will
– The cost of certain trading activities
negatively impact RoE.
(such as derivatives trading) is increasing
– Individual Countries will overlay dramatically.
additional requirements resulting in
– As the price of liquidity increases, the
locally increased target ratio’s
pressure on RoE increases.
exacerbating pressure on RoE.
– Capital requirements are increasing as a
result of the EU’s Capital Requirements
• Early on in the transition process Directive.
there is a need for a wealth of
information analysed at a highly
granular level, typically at the level You need detailed information
of the trade. for analysis at your fingertips.
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4. Why is Basel III such a challenge?
• The timetable for compliance is tight:
– The transition period started 1st January 2013. Minimum
capital requirements are now in place.
– Target Ratio’s are to be met on a stepped basis
up to 2019.
– Pressure from Ratings Agencies and Markets is
expected to demand compliance long before 2019.
• The rules are continuing to evolve:
– Changes to the LCR were agreed in January 2013.
– During 2013 additional aspects of the LCR will
be scrutinised and modifications to the NSFR
will be considered.
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5. Why is Basel III such a challenge?
• To survive Basel III organisational decision makers
must have a breadth of information at their fingertips
early in the transition process:
– At both the Corporate, Regional and Business Line level
B/S
every Balance Sheet item must be understood as must Substantiation
it’s demand for, and relative cost of, Liquidity.
– The Balance Sheet contractual maturity mismatch over
the short, medium and long term time horizon must be Market Maturity
clear, as must any imbalance between the timings of Developments Mismatches
cash inflows and outflows.
– The cost of maintaining positions with lower-rated
counterparties will increase therefore all opportunities
Information
for collateralisation and netting must be fully understood
and exploited.
– The location and nature of any unencumbered assets
must be known and opportunities for utilisation be Funding Collateralisation
clearly understood. Sources & & Netting
Funding Costs Opportunities
– All possible funding sources coupled with their
associated cost must be clear. Unencumbered
Assets
– Developments in the wider market must be understood
and taken into account.
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6. Moving towards a ‘Business Asset’
• Turning an ‘Overhead’ into a ‘Business Asset’
– Liquidity Management must now rank equally in
importance alongside:
• Risk Management
• Capital Planning
• Business Strategy
• Balance Sheet Management
– Only when Liquidity Management is a component part
of the day-to-day management of an organisation can
there be full transparency as to the impact Liquidity
can have on a business.
Only then can a business start With Liquidity Management being a core
to meet the requirements of component of day-to-day business
the regulators. management you have also gained a
very powerful business asset.
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7. Creating the ‘Business Asset’
• What are the success factors?
– Information must be timely:
• Useful in the ‘front-line’.
• Contribute to forward-looking decisions.
– Deployment of Liquid Funds must be clearly identifiable – it is a scarce resource:
• Are all liquid assets deployed efficiently?
• The cost of NOT utilising excess liquidity should be clear.
• Liquidity should be ‘priced’ when decisions are made, not after the fact.
– Are new sources of Liquidity available, and at what price?
• New business opportunities could be progressed if Liquidity is available.
– Liquidity concentrations across different business should be apparent:
• Scenario modelling then allows management of these concentrations.
– Changes and flexes in the Balance Sheet and its impact on Liquidity should be
easily understood allowing effective Balance Sheet management over time.
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8. Case Study: Business Challenges
Group Treasury were facing increasing demands
from external and internal stakeholders:
• Financial Markets / Investors:
– Returns expected with low tolerance for volatility
– Continuous product and market development
• Financial Regulation / Ratings Agencies:
– Regulations and ratings agencies were more demanding
– Focus on Capital and Liquidity Requirements
– Increasing reporting requirements and visibility
• Internal Drivers:
– Grow the business in the ‘Right Areas’
– Support the prioritisation of resources
– Focus on Liquidity, Capital and Balance Sheet Management
– Optimise Costs – the ‘New Normal’
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9. Case Study: Current Infrastructure
• Tasks structured around systems not
processes – sub optimal
• Data / Reporting:
– 35% - 90% of time / effort – data collation
– Reported data not fully reconciled
– Report completeness / accuracy ~ 85%
– Duplication of effort across different reports
– Data errors not fixed at source – high levels
of repeated manual adjustments
– Lack of audit trail / transparency
• Infrastructure:
– Major cause of project failure
– Reliance on project teams for reporting – high
cost and inefficient
– Forecasting and analytics capabilities
are limited
Currently struggling to meet current
regulatory requirements, future
requirements will increase.
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10. Case Study: The Catalyst for Change
Basel III was viewed as a
catalyst for change.
Basel III moved budget spend
associated with the ‘Group
Treasury Vision’ Project from
Discretionary to Mandatory.
Group Treasury were able to
prove that they couldn’t meet new
regulatory requirements given
their existing infrastructure and
associated business processes.
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11. Case Study: Infrastructure Requirements
Detailed analysis was performed to set Data Source Group Treasury
out the Infrastructure requirements to Providers
support the Group Treasury Vision. Feeds
GL
Group
• Budget approval was granted for a Treasury Single Investment &
Retail version Execution
Centralised Database designed to enable Banking of the
the following: truth Group Asset &
liability
– Simplified IT infrastructure to improve: Management
• Operational performance and support Markets
• Time to market for new products / reports Group Funding
• On boarding of new data feeds or systems Single Single
point for
• Controls for sharing data and reports data
all data Group Liquidity GL
• Automation of current manual processes External sourcin set Risk
Data g Management
– Data / Reporting:
• Reconcile Data – have confidence in the numbers
Group Capital
• Reduce duplicated effort Management
• Reduce manual adjustments – fix at source Referenc
e Data
• Increase transparency
Financial Risk
• Increase ability to analyse and advise and Control
– Time and tools to model and understand Joined up
the drivers of cost of funding and liquidity Infrastructure Reconciled
and data data with GL
across the bank governance
Data Governance & Operating Model
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12. Case Study: Evaluation Criteria
Corporate policy is to buy ‘Off the Shelf’ when is it not
possible to leverage existing solutions.
All options were therefore considered with the objective
of minimising delivery risk and accelerating the time
to market.
Evaluation Criteria:
• Solution Flexibility • Total Cost of Ownership
• Solution Functionality • Implementation Time
• Operational Risk • In-house skills/resources required
• Implementation Risk
Data
Off the Shelf Warehouse
Configurable led Solution Custom Do
Liquidity Risk with Integrated Database Nothing
Management Finance and
Solution Risk Data
Model
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13. Case Study: Infrastructure Choices
During the analysis phase a range of both Tactical and Strategic
options for the delivery of the Treasury Centralised Database
were considered:
• Buy an ‘Off the Shelf’ Treasury Solution: a configurable application
designed to deliver a high proportion of the requirements ‘out of the box’. ✓
• Include the Treasury Centralised Database requirements within an
existing Data Warehouse Solution. ✗
• Develop a custom Treasury Centralised Database Solution. ✗
• Develop a Treasury Centralised Database using their existing Liquidity
Reporting Database. ✗
• As-is with forced technical upgrades to meet minimum technical
requirements. This option excluded any new business requirement. ✗
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14. Contact us for more information on
Microgen’s Basel III Liquidity Risk
Monitoring Product
Product Brochure
marketing@microgen.com
UK: + 44 20 7496 8100
US: + 1 617 273 8289
www.microgen.com/liquidity
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