The Basel Committee's international framework for Liquidity Risk Management and Supervision is an attempt to fill some of the regulatory gaps that had triggered the recent global financial crisis. Globally it is becoming increasingly difficult to get secured funding and regulatory pressures are resulting in the drying up of sources of unsecured funding. This makes liquidity management challenging and the increased liquidity costs mandated by Basel III regulations are increasing IT investment costs and driving down profit margins.

Regulatory agencies are demanding increasingly reliable disclosures and forecasts of liquidity situations of financial institutions. This is driving banks to look at enhancing, upgrading or replacing their existing IT systems, in the pursuit of developing a robust LRM framework. There is a market need for a platform that is scalable, with the ability to manage and monitor liquidity risk effectively thereby reducing cost, enhancing efficiency and securing profit.

Let us look at some of the important trends/challenges that have emerged in the global LRM space:

  • Financial institutions are moving away from general purpose data integration tools, towards technologies that will enable them to transform data to provide meaningful reports, with varying levels of data granularity, based on specific regulatory requirements
  • Banks are looking to integrate balance sheet management into liquidity stress testing and planning frameworks
  • Regulatory needs, require financial institutions to adopt 'Real-time monitoring and analytics' frameworks, which help them to effectively manage their intraday positions by providing an enterprise wide view of capital
  • Sophisticated stress testing and scenario analysis is becoming vital for identification of liquidity constraints and plans for mitigation of the same
  • Consolidating and representing data from multiple systems (like trade, market, reference, payments, etc.) and diverse asset classes, creates the necessity to reconcile and check the data for consistency and potential differences
  • Banks are attempting to make trade-offs between managing high-volumes of granular data and potentially losing vital information.
  • Banks are seeking to create automated intra-day cash flow views to capture short-term and long-term cash positions.

Facing the Future

Banks have a three-pronged task of meeting the expectations of stakeholders, regulators and customers. Basel III regulations impose restrictions which will force them to seek more innovative ways to create operational efficiencies and market differentiation.

Banks will be forced to re-analyse their business strategies and make judicious IT investments to ramp up their technological infrastructure. The approach taken by an individual bank would be dictated by its business model and its size.