Who will manage banks' liquidity risk in the Basel III world?
David Millar, an advisory board member of the Risk and Regulation Working Group, sparks off a debate on whether the responsibility for managing liquidity risk at a bank should stay with the treasury.
February 28, 2011
| Aditya Puri
While liquidity risk management is now firmly within the scope of Basel III
and will impact risk management, asset and capital considerations for
banks and other financial institutions, it
remains unclear how banks will include liquidity risk in their existing risk
Liquidity management is both a very old and a very new concern for banks.
There have always been roles in banks, usually in the treasury department, with
the responsibility for ensuring that attention is paid to liquidity. For the
long term, the asset and liability management (ALM) committee (ALCO) concerns
itself with looking at the long term liabilities, usually in excess of one year, and
ensures that the balance between loans and deposits, premiums and claims, and,
more recently, derivative trade resolutions, are maintained and that there are no
significant problems with satisfying commitments. In the short term, the treasury
manages short term liabilities, in particular those stemming from interbank,
corporate and derivative liabilities.
Basel III introduces new approaches to this area as well as new reporting
responsibilities: the Liquidity Coverage Ratio (LCR) for short-term reporting,
and the Net Stable Funding Ratio (NSFR) with a time horizon of one year to
provide a “sustainable maturity structure of assets and liabilities”. Both
these ratios would normally fall into the areas managed by treasury, rather
than the ALCO, and treasury is managed by the CFO.
But the risk management team, as managed by the CRO, is also heavily
involved. Liquidity has to look at the level of encumbrance of all assets—but
credit and market risk considerations also have to be taken into account.
While there is little doubt that treasury will manage liquidity (the
movements of funds), it is unclear who will manage liquidity risk (the analysis
of the ability to manage liquidity). Will this remain in treasury and result in
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Categories: Risk And Regulation Working Group
Keywords:Regulation, Liquidity Risk