Page 37 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

Liquidity at Risk: A Measurement Approach within Banking Institutions
BY MONOCLE REGULATORY GROUP
The liquidity and credit crisis of 2007 and 2008 left the global nancial community concerned over liquidity risk. Suddenly, multi-national banking groups realised they had to broaden their understanding and measurement of risk beyond market, credit, and operational risk. ey needed to be able to anticipate liquidity strains in the markets – and strategise contingent funding.
While Basel II guidelines had not adequately addressed liquidity risk, Basel III proposals aimed to address this, with what are viewed by many as onerous liquidity ratios that were introduced in 2015. e ratios present a conundrum for banks; they need to comply with them, while still maintaining a competitive funding structure. But it’s not the ratios themselves that bring value, it’s the data accuracy and precision they demand.
e validation required for liquidity risk models will actually mean banks can get both an holistic and granular view of their risks. For example, the proposals imply that banks will need to distinguish between di erent behavioural aspects of diverse customers within a particular product. at means enhanced risk management capability, as well as pricing and customer selection.
If banks want to achieve the ambitions of the Basel regulations – and create a single, integrated platform for liquidity risk management, pricing, capital management, and strategic customer selection, they’ll need to implement a data-centric, market-factor driven, liquidity risk management framework. A framework that integrates credit, market, interest rate, and liquidity risk into a consistent set of metrics. And, in order to get that integrated risk view, and look precisely at the contribution of di erent risks to the liquidity risk solution, banks need granular data di erentiation.
“ e validation required for liquidity risk models will actually mean banks can get both an holistic and granular view of their risks.”
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