Credit Risk Mitigation by jerrit4


									 The Regulatory Framework and
   Approach to liquidity risk
       in the Netherlands

           PRMIA evening seminar
              11 November 2008
         Amsterdam School of Finance

                Hanne Meihuizen
Supervision policy / quantitative risk management

•   Liquidity risk
•   Current Dutch liquidity regime
•   Evaluation of Dutch liquidity regime
•   Agenda
                 Liquidity Risk (1)
• Current or prospective threat to an institution’s earnings
  and capital as a result of the possibility that it will not be
  able to meet its short-term payment obligations at any
  point in time without involving unacceptable costs or
  losses, because:
  - bank has insufficient (liquid) assets to sell or to pledge
  in order to obtain refinancing;
  - the markets for the assets in question have inadequate
  - bank has insufficient borrowing capacity due to
  insufficient solvency;
  - bank has insufficient funding relationships.
               Liquidity Risk (2)

•   Maturity mismatch in banking business
•   Liquidity Risk Management more complex:
-   Globalisation
-   Use of derivatives
-   Securitisation
-   More reliance on whole sale funding
•   Before turbulence: Underestimation of liquidity
  Dutch liquidity regime – overview

• Entered into force in July 2003
• Applies to banks, clearing institutions and
  collective investment schemes
• Consolidated on the banking group level
  (conform IFRS)
• Qualitative and quantitative requirements
         Qualitative requirements
Basel and CEBS:
Principles for Sound Liquidity Management and
   Supervision, e.g.:
- Governance of liquidity risk management
- Systems to identify, measure, monitor and control
   liquidity risk
- Internal pricing of liquidity costs and benefits
- Diversification of funding sources
- Contingency Funding Plans
- Liquidity Stress Testing
- Intraday liquidity risk management
- Buffer of very liquid assets
      Quantitative requirements (1)
• A bank shall have available at all times sufficient liquidity
  in proportion to the liquidity risks it is exposed to
• Anchored in liquidity reporting: estimated cash in and
  outflows and liquidity value of stocks
• Goal of liquidity reporting:
- General insight for supervisor in developments in bank’s
  liquidity position, including benchmark across banks
- Guarantee liquidity buffer: provides bank with time to
  adjust to unexpected adverse circumstances.
• Test for first week and first month ahead
• Observation horizons for projected cash flows: 1-3
  months, 3-6 months, 6-12 months, > 12 months ahead

• ‘Supervisory liquidity stress test’: combined bank
  specific and general market crisis scenario for
  first week and first month ahead
   - ‘rather extreme’
• Assumed cash flows and liquidity value of stocks
• ‘Actual liquidity’ > ‘Required liquidity’
• One week: assets in control of Treasury
• One months: all assets
            Actual liquidity (1)

• Assets available to meet immediate liquidity
  - saleable assets
  - eligible collateral at central banks
  - receivables from professional money market
• Positive cash flows from scheduled items
            Actual liquidity (2)

• Liquid assets weighted for market volatility,
  ‘haircuts’ when pledged, and behaviour
• behavioural assumptions, e.g.:
Amounts receivable from central banks and
  professional money market players are available
  in full (symmetry with required liquidity)
Amounts receivable from other counterparties:
  50% week, 40% month (roll-over)
          Required liquidity (1)

• Scheduled negative cash flows
• Stock variables: weighted: maximum net amount
  of assumed reduction in liquidity under stress
           Required liquidity (2)

• behavioural assumptions, e.g.:
- Funding from professional money market
  players will be called in full upon maturity (and
  not be available again)
- Unused irrevocable credit facilities will be
  withdrawn for 2.5% in week and 10% in month
- Fixed term retail saving deposits will be called
  for 20% upon maturity
- Retail savings accounts will be withdrawn for
  2,5% in week and 10% in month
             Scope of reporting

• Banking group wide
• Local liquidity surpluses can be included at the
  aggregate level if:
  - transferability is unlimited (no ‘ring-fencing’)
  - ‘going concern’ of subsidiary not threatened
  and local regulation not violated
  - currency is convertible
                Actual and Required liquidity and Surplus
                             month period


in mln euro´s

                1,500,000                                                                                    Aanw ezige Liquiditeit
                                                                                                             Vereiste Liquidteit
                1,000,000                                                                                    Liquiditeitsurplus









           Evaluation in 2008 (1)

More insight needed into liquidity risks:
- beyond first month
- from whole sale market dependency
- from retail deposits
          Evaluation in 2008 (2)

Main possible additions to reporting framework:
• Run off scenario: survival period target and
  realisation in all relevant currencies
• Ratio 3 months: Cumulative expiration of whole
  sale funding / actual liquidity in all relevant
• Haircuts for market risk on assets

• Implementation Principles for sound liquidity risk
• Consultation and implementation of changes in
  reporting framework
• Further international convergence of liquidity risk
  requirements, including quantitative

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