Issues for Regulators in Supervising
Liquidity Risk
Australia’s Perspective
Colleen Cassidy, Kelly Yeung and Victor Chandra
ADI Liquidity Review Project
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Presentation outline
• Structure of the Australian banking (ADI) industry
• APRA’s approach to liquidity risk supervision
• APRA’s liquidity project
• Overview of regulatory approaches
• Issues, challenges and ideas for change
• Next steps
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Structure of Australian banking (ADI) industry
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APRA’s approach to liquidity risk supervision
• Policy (APS 210) applies to all entity groups
• Mix of qualitative and quantitative requirements
• Qualitative requirements:
o
Liquidity management strategy and policy
o
Responsibilities of board and senior management
o
System and reporting requirements
o
Funding plans
o
Crisis management planning
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APRA’s approach to liquidity risk supervision
• Quantitative requirements:
o
Use one of two methods based on the sophistication of the ADI
o
Minimum Liquidity Holdings or Scenario Analysis
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APRA’s approach to liquidity risk supervision
• Minimum Liquidity Holdings Requirements:
• 9% of liabilities in liquid assets
• Liquid asset portfolio composition
o
cash
o
securities eligible for repurchase transactions with the central
bank
o
other investment grade bank bills and CDs issued by ADIs
o
deposits (at call and any other deposits readily convertible into
cash within two business days) held with other ADIs net of
placements by the other ADIs
o
any other securities approved by APRA
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APRA’s approach to liquidity risk supervision
• Scenario Analysis Approach
o
At least two scenarios
o
Assumptions about cash flow behaviour
• Going concern – the normal behaviour of cash flows
• Name crisis – cash flow behaviour in adverse operating circumstances specific
to the ADI, where the ADI has significant difficulty in rolling over
or replacing its liabilities
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Background to APRA’s liquidity project
• Policy implemented in late 90s as a replacement to the prime asset
requirement (the ‘PAR’ ratio)
• Changing market conditions
• Objective is to assess policy effectiveness
• High level guidance - open to interpretation?
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Background to APRA’s liquidity project
1. Issue identification and research
• ADI practice
• APRA practice
• Overseas supervisor guidance
2. Determining recommendations – industry discussion paper in H2 2007
3. Drafting revised policy and guidance
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Overview of regulatory approaches
• Based on BCBS liquidity guidance
– Sound Practices for Managing Liquidity in Banking Organisations (Feb 2000)
– High level and non-prescriptive in nature
– Focuses on qualitative aspects of liquidity risk management (13 principles
for banks; 1 principle for supervisors)
• Liquidity supervision approaches
– Typically consist of 2 key elements: qualitative and quantitative
requirements
– Some supervisors only rely on qualitative requirements and do not impose
quantitative requirements on banks
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Overview of regulatory approaches
• Qualitative requirements
– Tend to be similar in scope across major developed countries
– Reflect sound practices principles in BCBS liquidity guidance
– Cover governance, systems and controls, liquidity scenario analysis/
stress testing, contingency planning, etc
– Key difference: level of prescription required
Supervisors in major developed countries (including Australia) tend to
focus on principles-based requirements; some supervisors supplement
these requirements with more detailed guidance for implementation
purposes
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Overview of regulatory approaches
• Quantitative requirements
– Significant divergence in approaches across countries
– BCBS liquidity guidance allows supervisory discretion in setting
quantitative requirements (e.g. minimum liquidity ratios or mismatch
limits)
– Various approaches:
¾ Liquidity stock approach vs. Cash flow/Maturity mismatch approach
¾ A mixture of liquidity stock and cash flow mismatch approach
¾ Apply cash flow mismatch approach to certain types of institutions
and liquidity stock approach to others (e.g. UK and Australia)
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Overview of regulatory approaches
• Quantitative requirements: Liquidity stock approach
– Countries using this approach: Hong Kong, Singapore and UK (UK retail
banks)
– Require banks to hold a minimum stock of eligible liquid assets at all times
(typically expressed as a percentage of short-term liabilities)
– Differences in supervisory requirements on minimum ratios, asset
eligibility, valuation haircuts applied to liquid assets
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Overview of regulatory approaches
• Quantitative requirements: Cash flow/Maturity mismatch approach
– Countries using this approach: UK (other banks), Ireland and Netherlands
– Requires banks to forecast its cash flow mismatch positions for various
time horizons
– Differences in supervisory requirements on types of scenarios specified
and process for setting behavioural cash flow assumptions
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Issues, challenges and ideas for change
• Developing appropriate prudential requirements and/or guidance that aims to
maintain an appropriate balance between principles-based requirements and
prescription
– Qualitative requirements
– Quantitative requirements
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Issues, challenges and ideas for change
1. Application
o Use of scenario analysis by which types of entity
o Basis of assessment: group vs stand alone
o Treatment of branches
o Treatment of foreign currency
2. Liquid asset holdings
o Definition of eligible liquid assets
o How much?
o Haircuts?
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Issues, challenges and ideas for change
Liquid asset holdings - Asset types to include?
Cash and interbank deposits (convertible to cash in 2
days)
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RBA repoable securities (Government securities,
supranationals, bank bills and CDs)
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Corporate paper
?
Mortgage Backed Securities
?
Asset Backed Securities
?
FRNs
?
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Issues, challenges and ideas for change
3. Models
o Types of scenarios considered (market crisis scenario?)
o Setting assumptions
o Independent Review
o Liquidity reporting
• Customised reports vs. standardised returns
• Report content differs significantly across scenario analysis ADIs
(e.g. time bands and cash flow items covered in cash flow
profiles)
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Issues, challenges and ideas for change
Name Crisis Assumptions
Examples of assumptions used by banks
•
Retail call deposits
- 5% of balances run-off over 5 days
- 7.5% of balances run-off over 5 days
- Greater of 5% run-off or 3 s.d. of historic withdrawal rates over 5 days
- 5% run-off of remaining balances per day over 5 days
•
Other deposits
- 15% of “quasi-retail” balances run-off over 5 days
- 50% of “quasi-wholesale” balances run-off over 5 days
- 100% of maturing “wholesale deposits” run-off over 5 days
- 20% of “corporate deposit” balances run-off over 5 days
•
Undrawn commitments
- 5% of unutilised facilities are drawn down over 5 days
- 15% of unutilised facilities are drawn down over 5 days
- $xx million are drawn down over 5 days
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Issues, challenges and ideas for change
Name Crisis Assumptions
• Develop possible APRA guidance on run-off assumptions for key funding lines
and committed facilities under a crisis scenario?
Retail Deposits
Minimum 5% run-off over 5 days
Offshore and domestic
interbank funding
100 % run-off of all maturing funds over the 5
day crisis period. No new funds can be
obtained
Offshore and domestic
wholesale funding from
established programs
Where there is a demonstrated track record in
issuing to a market segment, a lower run-off
assumption is acceptable (50%)
“Quasi-wholesale”
domestic funding
Run-off in the order of 15-30% over 5 days for
long-standing relationship customer deposits
Committed facilities
100% of undrawn portion of the committed
facility unless historical drawdown rate can be
estimated
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Issues, challenges and ideas for change
4. Governance and organisational structures
5. Crisis management planning
o Contingent funding sources
o Certainty of standby facilities
o Treatment of industry-based liquidity support arrangements
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Issues, challenges and ideas for change
Liquidity crisis contingency plan
Bank A
Bank B
Bank C
Bank D
Identification of specific, measurable
indicators of liquidity crisis
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Procedures defining key roles &
responsibilities for managing liquidity
crisis
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Communication plans to internal and
external stakeholders
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Assessment of priority, reliability, cost
etc of contingent funding sources to
manage liquidity stress scenarios
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Testing liquidity crisis contingency
planning document
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Key elements
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Next Steps
• Work through issues
• Policy and guidance drafting
• Industry consultation
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