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Incorporating Liquidity Risk into
Funds Transfer Pricing: Progress
and Challenges
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Incorporating Liquidity Risk into Funds
Transfer Pricing:
Progress and Challenges
Agenda
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8.00 (flexible) onwards:
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Welcome - PRMIA Steering Committee member Donald
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Introduction to the day’s event by Vijay
Opening remarks by Kumar (FSA) followed by Arno
Commerzbank)
Panel discussion
Drinks at the Bar and networking
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Incorporating Liquidity Risk into Funds Transfer
Pricing: Progress and Challenges
Arno Kratky - Head of Liquidity Analytics, Group
Treasury, Commerzbank
Kumar Tangri - Risk Specialist, ALM & Liquidity, FSA
Vijay Krishnaswamy - Partner and Head of Enterprise
Risk Management, Hymans Robertson
www.prmia.org
FTP regulations: A clear view on the
horizon?
Kumar Tangri
6
Today’s Agenda
• How are regulations incorporating FTP into liquidity
management
• Will FTP play a larger role in future regulation
• Things to look out for
Overriding message
Good Funds Transfer Pricing practice drives sustainable
business models.
Messages from Funds Transfer Pricing help develop
strategy
Funds Transfer Pricing – what is
it?
Funds Transfer Pricing (FTP) is the mechanism by which
the
cost, benefits and risks of liquidity is reflected to a firm’s
business lines – i.e. a sophisticated, forward looking
pricing
model.
It is an internal measurement and allocation process that
assigns a liquidity risk-adjusted profit contribution value
to
funds gathered and lent or invested by the firm.
FTP is one aspect of full Transfer Pricing, which builds
hurdle
9
How are regulations incorporating FTP into
liquidity management
• BIS - Principles for Sound Liquidity Risk Management and
Supervision [Sept 2008] {Principle 4}
• FSA – PS09/16, Strengthening Liquidity Standards [October
2009] {BIPRU12.3.15E} {BIPRU12.5.4R}
• EBA – CP36 Guidelines on Liquidity Cost Benefit Allocation
[March 2010]
How are regulations incorporating FTP
into liquidity management
• PS09/16, Strengthening Liquidity Standards
{BIPRU12.3.15E}
States that firms should accurately quantify liquidity
costs, benefits and risks for
– product pricing
– performance measurement and incentives
– new product approval
Applies to significant business activity – on and off balance sheet
Consider FTP in normal and stressed conditions
Clear and transparent – needs to be understood across the business
11
How are regulations incorporating FTP
into liquidity management
• PS09/16, Strengthening Liquidity Standards {BIPRU12.5.4R}
Requires firms to include assessment of compliance with
BIPRU12.3 and BIPRU12.4 (systems and controls
requirements)
in the ILAA
Compliance influences ILG
12
Will FTP play a larger role in future
regulation
• Andrew Bailey, Executive Director, Bank of England and
Director, UK Banks and Building Societies, FSA - Santander
International Banking Conference 2009
“fire prevention is better than fire-fighting. We cannot justify
having a
banking system that depends on the use of public money to
douse
the fire when the crisis comes. And we also cannot allow
conditions
to exist where risks are taken on the basis that this backstop
exists.”
13
Will FTP play a larger role in future
regulation
• Withdrawal of taxpayer support – whether implicit or explicit
• Solo self sufficiency and sustainable business models
• Recovery and Resolution Planning
Good Funds Transfer Pricing practice drives
sustainable business models.
14
What do and will regulators expect
• FSA Dear Treasurer letter on Funds Transfer Pricing
(http://www.fsa.gov.uk/pubs/international/ftp_treasurer_letter.pdf)
• Benefits and pitfalls
Benefits
Informs business strategy by identifying the liquidity risk adjusted return
from
business activities. It helps prevent firms “sleep walking” into business
where
the true cost of funding is not covered.
Contributes to a sustainable business model.
Consequence of poor FTP
Misallocation of liquidity resource – like capital, liquidity is scarce and
needs to be
used wisely.
15
What do and will regulators expect
Things to look out for
• FTP governance – who owns and challenges the model?
Can it be gamed or arbitraged? Is it transparent to
stakeholders? Is treasury conflicted?
• What components are charged? Is the cost of liquidity buffer
recharged? Are all aspects of liquidity risk accounted for?
E.g. intra day liquidity, FSCS costs
• Is FTP accurate? Does it capture marginal costs? Can it be
back tested? Are there un-priced risks?
• Approach to back book – does this distort new product
pricing?
What do and will regulators expect
Things to look out for
• How detailed is FTP? Is it granular enough to influence
strategic and day to day transaction decisions? E.g. does it
distinguish between asset origination which can be
securitised versus assets that can’t?
• Does it incentivise appropriate business line behaviours?
SHOULD ENCOURAGE APPROPRIATE INCENTIVES – TO
WRITE AN OPTIMAL BUSINESS MIX
FRAMEWORK SHOULD BE PROPORTIONATE TO FIRMS’
SCALE AND COMPLEXITY - E.g. Frequency with which
prices
are reviewed, frequency of back testing
Funds Transfer
Funds TransferPricing
Pricing – hurdle rate
Commercial margin
Risk adjusted
profit
Hurdle rate
Cost of capital – credit risk
Cost of un-hedgeable risk (e.g. basis,
prepayment)
Cost of intra day liquidity
Cost of contingent commitments
FTP
Maturity transformation
Cost of funding Term liquidity premium
Recharge cost of liquidity
buffer sized using stress &
scenario testing
Marginal funding curve
Cost of funding Reference rate
e.g. 3 month Libor
18
What do and will regulators expect
FTP practices – marginal costing
19
Funds Transfer Pricing – marginal costing
Marginal cost
Yield (%)
Weighted average
cost, back book
Time (t)
20
Funds Transfer Pricing – marginal costing
• Pros
– Correctly captures the cost of doing new business
• Cons
Build up of residual unallocated P&L impact due to:
– FTP model not accurately reflecting the actual cost of funding
which
might be incurred, e.g. model charges Libor + 150bp as marginal
cost,
but actual incurred cost was Libor + 160bp
– management overlay, where a deliberate “subsidy” is embedded
in
pricing to incentivise behaviours, e.g. provide 50bp extra credit for
21
Funds Transfer Pricing – marginal costing
Yield (%)
Asset
Maturity
FTP model
assumptions
Funding cost ≠ FTP model
assumptions
Funding tenor ≠ FTP model
assumptions
Maturity
Time (t)
Liability
Yield (%)
Asset
Maturity
Yield (%)
Asset
Time (t)
Liability
Time (t)
Liability
22
Incorporating Liquidity Risk into Funds Transfer Pricing:
Progress and Challenges
Arno Kratky
Group Treasury
PRMIA, London January 18th, 2012
Agenda
1.
The Regulatory Framework
2.
Interplay with Internal Liquidity Management Framework
3.
Interplay with Fund Transfer Pricing
4.
Implications for bank’s steering framework
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
24
The building blocks of Basel III
International standard: Basel III
BCBS 164 / 189
BCBS 165 / 188
Capital
Leverage Ratio
More and better capital
• shift focus to core Tier I capital
• excluding hybrid capital
• deducting deferred tax assets
• minority interests not considered
• no Tier III component
Introduction of general
leverage ratio
• backstop ratio, not risk-based
• nominator is balance sheet total
plus (1) off-balance positions, (2)
un-netted derivatives, (3)
notional of written credit
derivatives
• denominator given by regulatory
Tier I capital
• broadly in line with IFRS
accounting
Higher RWA
• introduce credit value adjustment
• account for correlation risk
• higher charge on trading books
(stress VaR, incremental risk)
• increase counterparty risk
charge
(incentivise central counterparts)
Liquidity
Liquidity Coverage Ratio LCR
• Buffer to be held against short
term liquidity shortages
Net Stable Funding Ratio
• effectively limits maturity
transformation
Monitoring tools (information
only)
• contractual maturity mismatch
• concentration of funding
• unencumbered assets
• market-based data
Public disclosure
Higher capital ratios
Counter-cyclical capital buffers
European implementation: CRD 4
London
BCBS 189: Strengthening the resilience of the banking sector; BCBS 188: International framework for liquidity risk measurement, standardsPRMIA,
and monitoring
Group Treasury – Liquidity Analytics
January 18th, 2012
25
Understanding the Regulator‘s Perspective of Basel III in a Nutshell
Cash markets are fragile and can disappear quickly
Too much maturity transformation is unhealthy for the financial
system
Interconnected financial sectors can collapse like a house of
cards
There is good banking business (loans, deposits, service real
economy)
There is bad banking business (prop trading, derivatives, casino)
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
26
Liquidity Coverage Ratio / Liquidity Factors
Impact on different product types on identical balance sheets:
assets
assets
50 Government Bond
Buffer 201)
50 Government Bond
Buffer 50
50 ABS Bond (illiquid)
Buffer 0
50 ABS Bond (illiquid)
Buffer 0
1) Only 20 units unencumbered since 30 funded via repo
but
liabilities
liabilities
30 one week repo on
Government Bond
Outflow 0
30 3-months IB MM
Outflow 0
40 O/N retail (stable)
Outflow 2
30 one week repo on
ABS Bond
Outflow 30
30 O/N IB MM
Outflow 30
40 3 months retail
(stable)
Outflow 0
LCR 83%
LCR 1000%
No credit for short term secured funding of illiquid securities
No credit for short term wholesale (interbank) funding
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
27
Net Stable Funding Ratio / Liquidity Factors
Demonstration of the impact on different products and trading strategies:
Liabilities
3 Mon. CP nonfinancial
Assets
Corporate Bond AA
Liabilities
NSFR 250%
RSF 20%
Assets
9-months loan to
Hedge Fund
9 Mon. Repo
ASF 50%
ASF 0%
NSFR 0%
Assets
Corporate Bond AA
RSF 20%
Assets
RSF 0%
Listed Equity
RSF 50%
Assets
Assets
6m Reverse Repo on
3y Corp. Bond A+
RSF 0%
3y Corp. Bond A+
funded via 6m Repo
RSF 50%
5y Government Bond
RSF 5%
2y Reverse Repo on
Government Bond
RSF 100%
Assets
Unencumbered
mortgage loan Basel II
KSA 35% >1y
(independent on
maturity)
Group Treasury – Liquidity Analytics
Assets
RSF 65%
Mortgage loan > 1y in
covered pool funded by
Covered Bond
RSF 100%
+ Overcollateralisation
for target rating
PRMIA, London January 18th, 2012
28
Liquidity Implications Non-Operational Corporate Deposits
Interplay between LCR and NSFR for non-operational corporate deposits and (short-term) corporate loan
Assets
Liabilities
100m Non-op. Corporate Deposit
Outflow (LCR)
75% => 75m
75m Level 1 Asset
Buffer (LCR) 100% => 75m
RSF (NSFR)
Remaining Cash
ASF (NSFR) 50% =>
50m
25m
25m Term Loan
5% =>
3,75m
RSF (NSFR) 100% => 25m
=> 100m corporate deposits fund 25m term loans
LCR =
75
75
= 100%
NSFR =
50
28,75
= 174%
Though there is headroom in the NSFR, the bank can not lend more (in cash) due to LCR restriction
Buying Level 1 assets for the buffer itself generate an additional NSFR requirement
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
29
Liquidity Implications Non-Operational Corporate Deposits
Interplay between LCR and NSFR for non-operational corporate deposits and (short-term) corporate loan
Assets
Liabilities
100m Non-op. Corporate Deposit
Outflow (LCR)
75% => 75m
75m Level 1 Asset
Buffer (LCR) 100% => 75m
5% =>
3,75m
RSF (NSFR) 100% =>
46,25m
RSF (NSFR)
Remaining Cash
25m
ASF (NSFR) 50% =>
50m
21.25m short term wholesale >
30d
Outflow (LCR) 0% => 0m
Extra cash
46,25m Term
Loan
=> 100m corporate deposits fund 46,25m term loans
LCR =
75
75
= 100%
NSFR =
50
50
= 100%
21.25m
In order to use the NSFR ‘capacity’ the bank has to extend its balance sheet and borrow another 21m >
30days at extra costs, which also may compromise the bank’s liquidity ratio (and bank levy)
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
30
Inefficient Liquidity Transfer within the Banking System (1/3)
Bank A
1
Cash 5
Equity 5
LCR Buffer (100%) = 5
ASF(100%) 5
Bank B
Cash 5
Equity 5
LCR Buffer (100%) = 5 ASF(100%) 5
Retail Loan 100
RSF(85%) = 85
Stable Deposits 100
ASF(90%) = 90
LCR outflow (5%) = 5
Bank B borrowing funds via stable deposits (<1yr) and lending on term to retail customers (<1yr, but
no inflows < 30days). Bank A just holds cash.
Bank A
Balance Sheet
Buffer
Net Outflows
ASF
RSF
5
5
0
5
0
Bank B
105
5
5
95
85
Bank A
Bank B
LCR
> 100%
100%
NSFR
> 100%
112%
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
31
Inefficient Liquidity Transfer within the Banking System (2/3)
Bank A
2
Bank B
Cash 0
Equity 5
LCR Buffer (100%) = 0 ASF (100%) 5
Retail Loan 100
RSF(85%) = 85
Cash 10
Equity 5
LCR Buffer (100%) = 10 ASF (100%) 5
Deposit from FI > 1yr 95Loan to FI > 1yr 95
RSF(100%) = 95
ASF(100%) = 95
Stable Deposits 100
ASF(90%) = 90
LCR outflow (5%) = 5
Liquidity Transfer of 95
Bank B may transfer liquidity within the banking sector to Bank A via a long-term money market loan.
Bank A invests the proceeds into the same portfolio of retail loans as before.
RSF for Bank’s B loans increases from 85% to 100%, hence it can only lend 95 to Bank A (Bank B
holds the balance in cash and hence increases its buffer). Using its cash balance of 5, Bank A can
lend 100 to the private sector.
Balance Sheet
Buffer
Net Outflows
ASF
RSF
Bank A Bank B
100
105
0
10
0
5
100
95
85
95
Bank A
Bank B
LCR
> 100%
200%
NSFR
118%
100%
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
32
Inefficient Liquidity Transfer within the Banking System (3/3)
Bank A
3
Cash 0
Equity 5
LCR Buffer (100%) = 0 ASF (100%) 5
Retail Loan 100
RSF(85%) = 85
Bank B
Cash 10
Equity 5
LCR Buffer (100%) = 10 ASF (100%) 5
Deposit from FI < 1yr 95 Loan to FI < 1yr 95
RSF(100%) = 0
ASF(0%) = 0
Stable Deposits 100
ASF(90%) = 90
LCR outflow (5%) = 5
When the remaining maturity of the liquidity transfer runs below one year, the efficiency of
the liquidity allocation gets impaired. Though the external economic position from the
banking sector to the private sector remains unchanged, Bank A would now be required to
take additional term funding to comply with the NSFR (inflating its balance sheet) passing
on additional costs to its clients or has to withdraw its loans to its customers.
Balance Sheet
Buffer
Net Outflows
ASF
RSF
Bank A Bank B
100
105
0
10
0
5
5
95
85
0
Bank A
Bank B
LCR
> 100%
200%
NSFR
6%
>> 100%
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
33
Basel III – Commerzbank‘s Contribution to the Industry Dialogue
Participation in Industry working groups
Aligned Banks
Banking Associations
Commerzbank plays an active role in liquidity working groups in various banking associations and
bilateral discussions with aligned banks as well as with national regulators
Regulatory Authorities
…and
others…
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
34
Agenda
1.
The Regulatory Framework
2.
Interplay with Internal Liquidity Management Framework
3.
Interplay with Fund Transfer Pricing
4.
Implications for bank’s steering framework
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
35
Increasing Complexity
Regulation is a moving target and subject to substantial changes
Cumulative effects of regulation and associated (unintended) consequences on markets and banks
business models are not well understood
Regulatory (minimum) requirements will become more binding and need to be actively managed
Ratios can not be seen in isolation but need to be managed simultaneously as ratios are interlinked.
Measures which are positive for one ratio can turn out to have negative outcomes for another
Banks are left with only little flexibility to manage cumulative effects effectively and to manage
liquidity efficiently
New regulations lead to alignment of liquidity management frameworks across banks which may
result in more rather than less systemic risk
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
36
Main Differences between Regulatory and Industry Approach
Regulatory Approach *)
Short term
Liquidity Coverage Ratio (LCR)
Operational Liquidity Management
• Observation period 30 days
Commerzbank
SFRcash flow
• 30 days point-in-time
cumulative
• Narrow definition of liquid assets (no financials)
• Focus on secondary market liquidity
• No roll-over assumption for interbank funding
• Monoblock measure
• Continuous observation period up to 12 months
Commerzbank
SFRwhole period
• Representation
of cash flow over
• Wider definition of liquid assets
• Consideration of central bank eligibility
• Consideration of interbank funding potential
• Decomposition into legal cashflows, behavioural
adjustments and liquidity capacity
• Allows for different scenario calculation
• Measure expressed as surplus
• Only combined stress scenario
• Measure expressed as ratio
Net Stable Funding Ratio (NSFR)
Commerzbank SFR
• Severe Stress scenario
Long Term
• Minimum ratio 100% permanent
• Assets and liabilities differentiated by type of
customer and relationship
• All securities require stable funding (haircut)
• Loan business funded as per roll-over fiction
• Matched funded structures not considered
• Contingent liquidity require stable funding
• Covered bonds (self-issued) not considered
as stable funding if remaining maturity < 1
year, covered pool still attracts RSF
*) BCBS 188 as of December 2010
Group Treasury – Liquidity Analytics
Industry Approach **)
**) Observed methodology across firms
Structural Liquidity Management
Commerzbank SFR
• Less severe scenario w/o need for CM
funding
• Target corridor instead of strict limits
• Assets and liabilities differentiated by product
type and business owner
• Less liquid securities funded on haircut
• Core loan business requires stable funding
• Matched funded structures considered
• Contingent liquidity considered in stress
portfolio
• Covered bonds (self-issued) considered
(partly) as stable funding also if remaining
PRMIA, London January 18th, 2012
maturity < 1 year.
37
Does Basel III overrule internal fund transfer pricing ?
Internal treatment
more conservative than BIII
Internal treatment
consistent with BIII
Internal treatment
more aggressive than
BIII
()


• Is internal treatment
still competitive ?
• Only little impact on
running business
• Will change of internal
treatment be
challenged by
supervisor ?
• The least need for
adjustment
• Regulatory liquidity
requirement need to
be ‘subsidized’ by
other products
• Business in danger of
being unprofitable
• How to migrate to
regulatory compliance
?
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
38
Does Basel III overrule Internal Funds Transfer Pricing ?
Compliance of external and internal requirements on aggregate level
LCR


Basel III
NSFR

operational
Steering Independent

Internal
structural
Less complex, but steering in case of breaches less efficient
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
39
Does Basel III overrule Internal Funds Transfer Pricing ?
Compliance of external and internal requirements on product level
Assets
Loans
Basel III
Deposits
Facilities
...
others





Assets
Loans
Deposits
Internal
Facilities
...
others
External requirements have significant influence but steering mechanism is synchronized
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
40
Agenda
1.
The Regulatory Framework
2.
Interplay with Internal Liquidity Management Framework
3.
Interplay with Fund Transfer Pricing
4.
Implications for bank’s steering framework
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
41
Integrated Steering Framework
Basel III will influence internal processes, but is neither a blue-print for an internal steering
system nor for an internal (liquidity) funds transfer price system
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
42
Does Basel III overrule internal fund transfer pricing ?
Major banks employ a liquidity management system and fund transfer pricing methodology
similar to Basel 3 but which differ with regard to parameters. How does a bank cobe with the
difference?
Working example (asset vs asset):
Balance Sheet
Volume100
m
Corporat
e Loan
RSF / internal requirement
100
50%
%
100
50m
Ratio met at overall level
but triggered by different products
Loans -> ‚too expensive‘
Facilities -> ‚too cheap‘
m
1bn
Credit
Facility
5%
0%
50m
Basel III
Internal
NSFR
Requirement
50m
50m
100
Basel III
m
Internal
NSFR
SF
Options to deal with:
1. Treat Basel III / FTP separately
-> two steering mechanism to follow
2. Only adobt induced regulatory ‚minimum‘ requirement -> conservative / expensive but aligned on
product
level
3. Adjust
FTP towards regulatory framework
-> most consistent alignment, abandonment of own eco
assessment, could be challenged by regulator
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
43
How to adopt Basel III to internal fund transfer pricing ?
Banks need to set steering signals to their trading units to manage restructuring of balance
sheets. Timing is an important component. How fast should banks implement Basel 3 rules in
FTP?
Working example: Funding of a financial bond
Currently, banks fund financials short term as they are tradable in financial markets. However, Basel 3
requires term funding latest by 2018. Banks have to adust their funding accordingly:
FTP
(in
bps)
201
1
FTP
(in
bps)
1
201
8
Tim
e
201
1
2
201
8
FTP
(in
bps)
201
1
3
201
8
Options:
1. Keep current FTP and adjust as late as possible
-> inappropriate adjustment to Basel
3
2. Adjust FTP immediately for anticipated B 3 funding costs
-> triggering of unintended
consequences?
PRMIA, London January 18th, 2012
3. Phase-in higher charges over time and signal to the trading desks -> proportional migration to reg.
Group Treasury – Liquidity Analytics
environment
44
Agenda
1.
The Regulatory Framework
2.
Interplay with Internal Liquidity Management Framework
3.
Interplay with Fund Transfer Pricing
4.
Implications for bank’s steering framework
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
45
Where the Business is affected
Understand mechanics of Basel III and implications on business model
Analyze portfolio mix and identify which products will have different treatment under regulatory rules
compared to current internal treatment
Consider potential pricing implications on anchor products (PK: retail loans & deposits, MSB:
corporate loan book, C&M: trading portfolio, matched book, equity financing, ABF: secured financing)
Understand need of customers and potential implication for end-users (to facilitate dialog with
supervisors)
Monitor competitors and their potential adjustments to product mix and/or pricing behavior
Assess potential to pass on additional costs or anticipate structural changes to product mix
Think about product innovation (but be aware of reputational limitation to exercise optionality)
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
46
Behavioral Adaption to NSFR
NSFR Isolines
Potential Adjustments on Business Model
•
•
•
•
ASF
compress net position of derivatives
cut credit lines
focus on advisory business
revival of ‚originate and distribute‘ model
1
ASF
2
NSFR
NSFR =
RSF
RSF
To improve a given NSFR (indicated by
in the
chart above) an institution has two options:
1.
2.
The institution can increase the ASF by
adjusting the liability side of ist balance sheet
(e.g. liabilities with higher roll-over factors or
longer duration)
The institution can decrease the RSF by
adjusting the asset side of ist balance sheet
(e.g. assets with lower roll-over factors or
shorter duration)
Group Treasury – Liquidity Analytics
Adjust Asset Side
• reduce maturities
• shift to assets with
lower RSF
impact on
earnings

Adjust Liability Side
• increase maturities
• shift to liabilities with
higher ASF
impact on
costs

PRMIA, London January 18th, 2012
47
Potential Steering Measures to Manage the LCR
Liquidity buffer
LCR =
(Cash outflow – Cash inflowcap 75%) ≤ 30d
Levers to manage the ratio:
Increase Liquidity buffer
(-> higher costs)
Decrease Cash outflow
(-> lower returns)
Hold more Cash
Increase duration of liabilites (e.g.
short term deposits)
Sell illiquid assets and buy level
1/2 assets
Increase stability of deposits (e.g.
stable retail deposits and
wholesale operational accounts)
Increase Cash inflow
(-> lower returns)
Decrease duration of assets (e.g.
short term loans)
Decrease potencial liquidity drains
(credit/ liquidity facilities)
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
48
Potential Steering Measures to Manage the NSFR
Available Stable Funding (ASF)
NSFR =
Required Stable Funding (RSF)
In principle, the bank has two levers to manage the ratio:
Increase ASF (-> higher costs)
Decrease RSF (-> lower returns)
Securitize existing business which is already term
funded (and keep existing funding)
Sell (non-level 1/2) assets
Substitute liabilities with short duration (<1y) by
liabilities with longer duration (>1yr)
Substitute assets with longer duration (>1yr) by assets
with shorter duration (<1y)
Substitute liabilities with low ASF (wholesale) by
liabilities with higher ASF (retail)
Substitute assets with high RSF (illiquid bonds, term
loans, retail loans) by assets with lower RSF (0%-risk
weight govies, short term loans to financial institutions)
Originate new liabilities (and invest cash into assets with
lower RSF)
New asset business does not improve the ratio
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Group Treasury – Liquidity Analytics
49
Regulatory Requirements – More than a Compulsory Excercise
Liquidity requirements such as LCR and NSFR, as currently stipulated by known drafts of Basel III and
CRD IV, respectively, will have much more significance for liquidity management and steering due
to their pronounced stress-orientated design, which is more demanding than current national regulatory
liquidity requirements in place
Forthcoming regulation will not allow for an escape clause, allowing institution to apply internal
liquidity models for regulatory reporting purposes instead of standardised external rules. Hence, liquidity
regulation becomes instantaneous binding once they become effective.
At the same time, financial markets evidence tightening liquidity situation expressed in terms of
volatility, increasing liquidity premia and restraint liquidity supply, both in volume and tenor.
The combination of increasing regulatory (minimum-) requirements and increasing liquidity costs
necessitate an efficient management and steering of liquidity in order to achieve an optimal level of
compliance and to avoid extra-ordinary liquidity buffers and associated costs.
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
50
Group Treasury – Liquidity Analytics
Contact: Arno Kratky
Phone: +49 (0)69 136 82657
Fax:
+49 (0)69 136 81264
E-mail: arno.kratky@commerzbank.com
Visitors’ address:
Mainzer Landstrasse 153
60327 Frankfurt/Main
Germany
www.commerzbank.com
Postal address:
60261 Frankfurt/Main
Germany
Phone: +49 69 136-20
E-mail: info@commerzbank.com
Disclaimer
Investor Relations
This presentation contains forward-looking statements. Forward-looking statements are statements that are not historical
facts; they include statements about Commerzbank’s beliefs and expectations and the assumptions underlying them. These
statements are based on plans, estimates and projections as they are currently available to the management of
Commerzbank. Forward-looking statements therefore speak only as of the date they are made, and Commerzbank
undertakes no obligation to update publicly any of them in light of new information or future events. By their very nature,
forward-looking statements involve risks and uncertainties. A number of important factors could therefore cause actual
results to differ materially from those contained in any forward-looking statement. Such factors include, among others, the
conditions in the financial markets in Germany, in Europe, in the United States and elsewhere from which Commerzbank
derives a substantial portion of its revenues and in which it hold a substantial portion of its assets, the development of asset
prices and market volatility, potential defaults of borrowers or trading counterparties, the implementation of its strategic
initiatives and the reliability of its risk management policies.
In addition, this presentation contains financial and other information which has been derived from publicly available
information disclosed by persons other than Commerzbank (“external data”). In particular, external data has been derived
from industry and customer-related data and other calculations taken or derived from industry reports published by third
parties, market research reports and commercial publications. Commercial publications generally state that the information
they contain has originated from sources assumed to be reliable, but that the accuracy and completeness of such
information is not guaranteed and that the calculations contained therein are based on a series of assumptions. The external
data has not been independently verified by Commerzbank. Therefore, Commerzbank cannot assume any responsibility for
the accuracy of the external data taken or derived from public sources.
PRMIA, London January 18th, 2012
Group Treasury – Liquidity Analytics
52
Q&A
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