File name: Chapter 1 of 4: Managing intraday liquidity in a changing regulatory environment; Dodd-Frank, EMIR and Basel III – what they mean
for liquidity managers
Michael
Imerson
Christian
Goerlach
M.I
C.G
M.I
C.G
M.I
C.G
Hello and welcome to this master class discussion on liquidity management for banks, brought to you by The Banker magazine
from our studios in London. My name is Michael Imerson, I am an editor at The Banker, and I’m joined here today by Christian
Goerlach, who is the director of cash management for financial institutions, working with the Global Transaction Banking division
of Deutsche Bank. Now, Christian could you, before you start to tell us about the big issues in liquidity management, could you
just set the scene by explaining exactly what you do at Deutsche?
Right. So I work for Deutsche Bank GTB, which stands for Global Transaction Banking, and is one of the four defined strategic
businesses of the bank. Within transaction banking, I am responsible for the balance sheet and the net interest income of our
financial institutions franchise. And this comprises, if looked at the balance sheet, of a high double-digit billion portfolio. And
transaction banking, like the name suggests, is really driven by transactions, so it’s from payments, it’s from custody, it’s from
trust services, it’s accounts; and liquidity or balance sheet usage is usually only a side-effect; but if looking at the contribution, at
the bottom-line contribution on it, from the published numbers on the market over the last years, on average 40-50% of the
transaction banking revenues were coming from these balance sheets, so while it is not a primary driver, it's a significant
contributor, so we need to keep this on the radar screen, not only because of the low-interest environment that we are currently
in but also because of the structural regulation that we see in the area of liquidity.
And regulation, as it affects liquidity management, is what we are here to talk about today, primarily. Which regulations are giving
most concern for bank treasurers and liquidity managers?
Right. Well there are really a lot of them out there. Let me pick a few; and let me also pick some that have direct impact on
liquidity and some that have an indirect impact on liquidity. So with indirect impact, I mean things like – and let me use an
example – the over-the-counter derivatives reforms: in Europe it’s EMIR, in the US it is Dodd-Frank. And the primary aim from
these regulations is to move derivatives that are cleared bilaterally onto a centre platform, and the goal is to increase
transparency and to reduce counterparty settlement risk. But by moving it all onto the same platform, and by also having them
process in the same way, it has impact on the liquidity and impact on how these items are processed. But there are also
regulations that have a direct impact on the liquidity and the most prominent ones, obviously, are the Basel routes, so basically
the liquidity coverage ratio, which aims to ensure that banks can withstand liquidity issue for 30 days, [and then a] stable funding
ratio, which basically addresses the maturity transformation; so basically: How much of the short-term liquidity can banks use to
fund long-term loans? And last but not least, there’s also new regulation out there which addresses the intraday.
Well, all these regulations seem to make sense to me. I know a lot of bankers have got concerns about them, but surely it's a good
thing if banks are encouraged to have more liquidity – after all, that was one of the main causes of the financial crisis. So what's so
onerous about all of these liquidity management regulations? Surely they’re a good thing.
Yeah, absolutely, so I think here we share the same goals as banks and regulators for financial stability, so there I think there’s a
broad consensus in the market that these are- all the regulations are addressing and the right things. And you could always argue
about whether the number should be a little bit higher, a little bit lower, or the thresholds should be set a little bit different; but
the point here is that even if every single regulation makes sense on its own, we need to be intelligent when we implement them
so that we avoid unintended consequences when the regulations start to interplay with each other. So, to give you an example,
and let's just stick with the derivatives that we mentioned before...
…The OTC…
…The OTC derivatives, yeah. When we move them onto the platform, like I just said, it's not primarily driven from the liquidity
side but it has impact, and what it will do is it will have an impact on how these derivatives settle, in the day. So there is a more- a
better framework around it and we have the settlement all taking place at the same time, so we need a lot of intraday liquidity
capacity in order to be able to facilitate these settlements. At the same time, it is required, when we move them onto the central
counterparts, to collateralise them. And what we see here is that the collateral that is used to collateralise the margin [costs]is the
same collateral that is used at a central bank for getting access to intraday liquidity which is required for the for the settlement of
these contracts.