Closing the gap. Liquidity management survey of European banks
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2 August 2011 |
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ERNST & YOUNG S.R.L. |
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Executive summary
Our survey explores banks’ plans for enhancement, as well as their views on the likely challenges and potential benefits.
At the end of 2010, Ernst & Young surveyed 26 banks based in France, the UK, Switzerland, Germany and the Netherlands. Interviewees were asked a range of questions about their plans for, and progress with, enhancements to their liquidity risk management frameworks. The survey group included local and international banks, spread across retail banking, investment banking and universal banking.
The survey shows that the majority of European banks are focused on improving their liquidity risk management, but it also reveals considerable variation among countries and subsectors. In particular, we highlight these key findings:
► Most European banks have established a regulatory agenda, with liquidity risk management identified by many as their top priority
► Surprisingly few banks feel they have a considerable way to go to achieve compliance with the liquidity requirements of Basel III. Given the experience of UKbased banks in introducing similar requirements, particularly with regard to liquidity reporting, this might be overconfident
► Uncertainty over the final shape of new regulation is affecting banks’ ability to make improvements to their liquidity frameworks
► Banks are keen to improve their liquidity risk management capabilities quickly, and are hoping this will optimize their funding costs
► Stress testing, risk appetites, contingency planning and scenario analysis are some of the areas most often identified for improvement. Some banks are also hoping to link liquidity management with Internal Capital Adequacy Assessment Process (ICAAP) processes, but so far awareness of this issue is low
► To deliver these changes, implementation teams are focusing their efforts onadapting IT systems, improving data management, updating documentationand strengthening reporting and governance. Cultural factors are also seen as apotential challenge
The survey results reveal some further underlying themes
Drawing on our understanding of the European banking industry, our analysis of the findings identifies some further themes that cut across the survey data. The first is that liquidity risk management is not just a regulatory imperative, but something vital to every bank’s business model. Banks remain sensitive not only to their actual liquidity risks but also to external perceptions of their liquidity profiles. Each wishes not only to minimize its funding costs but also to avoid being seen as “off the pace.”
The second theme is that the largest and most sophisticated banks believe that the rules will have a much greater impact on their business than is the case for smaller banks. These are also the banks putting the greatest efforts into liquidity risk management improvements.
The third theme is that many banks’ approach to liquidity risk management is undergoing a permanent change. Dedicated liquidity management by Asset and Liability Committees (ALCOs) appears to be on the wane, with group-wide risk management functions taking a larger role.
Basel III liquidity rules have a number of potential strategic implications
The survey underlines the fact that, despite the Basel Committee’s decisions to extend compliance deadlines and widen the definition of eligible liquid assets, the new rules will have a profound impact on individual banks’ business models and on the wider industry in Europe and beyond.
While the public debate over banking reform has concentrated on capital levels and industry structure, we feel that many banks — particularly the larger, more complex groups — may be more concerned about the impact of liquidity regulation, especially when viewed in tandem with the development of “recovery and resolution planning.” Taken together, these issues will have a significant impact on the way that banks function and the way their balance sheets are constructed. They will, in fact, determine the extent to which banks can perform their unique functions of maturity and liquidity transformation.
The new requirements will therefore have an effect on such diverse areas as legal structures, interbank relationships, the products banks offer to customers, business unit strategy, performance management and remuneration. They will also require banks to make credit and funding decisions within an integrated balance sheet management framework — something that will often run counter to traditional approaches.
Key findings
1. Agenda and strategy
Most European banks are establishing a regulatory agenda
A large majority (85%) of the banks surveyed say they have set up a regulatory agenda. This is no great surprise, given the sheer volume of new regulations confronting the European banking industry. This includes not only Basel III but also the various effects of the Dodd-Frank Act, the impact of Solvency II on banks that sell insurance products and local requirements for the establishment of recovery and resolution planning. The ongoing debate over banking regulation may be global, but implementation remains the province of local supervisors. It is therefore no surprise that all of the UK banks surveyed have established a regulatory agenda, given the FSA’s rapid rollout of new requirements over the past two years.
The relative complexity of international banks’ business models means that they are particularly aware of regulatory challenges, with 95% having set up a compliance agenda. In contrast, only 57% of local banks have set up a regulatory agenda. This reflects a combination of lower awareness, less exposure to new requirements and fewer available resources.
