The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

Opinion: Will New Liquidity Reporting Lead to a Big Chill?

By Georges Bory, Co-Founder and Managing Director, Quartet FS

The collapse and bankruptcy of Lehman Brothers in 2008 is an extreme example of what can happen when the ratio of liquidity holdings to potential debt is inadequate. The bank was hit with a liquidity crisis as a result of the collapse in the sub-prime mortgage market, compromising the liquid resources it had available to pay its creditors. Since this high profile collapse, the liquidity arrangements of financial institutions have been under increasing scrutiny, externally from regulators as well as internally.

These regulatory bodies have responded to the liquidity crisis by publishing new guidelines (as part of Basel III) to manage the various forms of liquidity risk. In January 2013, we saw these guidelines taken to the next level, with the introduction of the Basel III Liquidity Coverage Ratio (LCR) – which enhances monitoring measures to bolster short-term resilience to liquidity events.

However, this latest addition to the regulatory canon does not require the measurement or reporting of intraday liquidity risk profiles – a situation set to be rectified on the January 1, 2015. In under a year, the Basel Committee on Banking Supervision (BCBS), in partnership with the Committee on Payment and Settlement Systems (CPSS), will require monthly intraday liquidity measurement and reporting from internationally active banks. This change will further increase internal and external visibility of how a bank’s liquidity ratio reacts in both normal and stressed conditions. Banks will have to demonstrate that their payment and settlement systems will continue to function as normal, even if there is a significant credit downgrade or market shift.

The immediate challenge

These new intraday liquidity reporting measures mean increased pressure on the banking technology being used by risk managers and analysts to collect and deliver liquidity data.  A recent report into counterparty data analysis and reporting by the Senior Supervisors Group highlighted the flaws in banks’ existing IT structures, meaning, at least when it comes to liquidity reporting, the situation needs to be rectified urgently. As it stands, banks are producing pre-canned liquidity reports, which require recalibration to display newly inputted data.  Due to this inflexibility, this type of report is of limited use when it comes to future intraday reporting.

A reporting refresh

To meet the new liquidity reporting requirements, financial institutions will need to deliver intraday liquidity reporting using a range of new metrics. These were introduced by the BCBS and the CPSS to increase the scope of liquidity data being provided, with reports set to include liquidity indicators such as total payments settled and received, timing of intraday settlements, intraday liquidity usage, intraday credit lines extended to customers, and available liquidity at the start of the business day. Not only that, but institutions will be asked to compile and execute various stress tests and sample scenarios based on these monitoring parameters.

Regulatory oversight of liquidity will not be limited to monthly reporting, however. Regulators will now be contacting financial institutions without warning, enquiring about how they monitor liquidity ratios. Possible questions include: “Who are the top 10 counterparties that represent 80% of the bank’s funding structure?” or “who are the top 100 private customers with demand deposits showing a maturity of less than a month?” Without knowing what information regulators will request, banks need to be ready to produce ad-hoc reports on-the-fly, a situation which means that the pre-aggregation of data (a tactic the current reporting structure depends on) is no longer a reliable method of meeting reporting obligations.

The future is in-memory

An emerging solution to help support the intraday liquidity reporting transition is in-memory aggregation engines combining transactional and analytical processing. This is due to their ability to simulate cash-flow scenarios, across asset classes, from multiple data source streams – all on the fly. Delivering liquidity ratios and graphical representations in milliseconds, as well as an ability to render adjusted scenario forecasts, means that even complex information can be quickly and easily parsed by analysts. Metrics such as the LCR, or expected liquidity exposure, can be produced in real time according to, for example, currency fluctuations – a facility of increasing importance in a fast trading environment.

With the January start date fast approaching, those in charge of the reporting and data management in banks need to be allocating the correct resources to tackle these upcoming regulations – implementing technology as a supporting solution. As mentioned previously, the report on counterparty data shows that capabilities in data management and analytics are behind regulators’ expectations in major banks. Without the appropriate technology, some institutions may risk the wrath of regulators, if not equipped to handle the new liquidity reporting requirements.

Related content


Recorded Webinar: Managing LIBOR transition

The clock is ticking on the decommissioning of LIBOR towards the end of this year, leaving financial institutions with little time to identify where LIBOR is embedded in their processes, assess alternative benchmarks and reference rates, and ensure a smooth transition. Some will be ahead of others, but the challenges are significant for all as...


ACA Compliance Group Launches New Global ESG Practice

ACA Compliance Group (ACA) today launched a specialist global environmental, social, and governance (ESG) advisory practice, headed up by Dan Mistler, who joins ACA from ESG and environment firm, Bridge House Advisors. Sustainability and responsible investing increasingly appear on the agendas of global political leaders, regulators, and firms alike. According to President-elect Joe Biden, the U.S. will...


RegTech Summit APAC Virtual

RegTech Summit APAC will explore the current regulatory environment in Asia Pacific, the impact of COVID on the RegTech industry and the extent to which the pandemic has acted a catalyst for RegTech adoption in financial markets.


Entity Data Management Handbook – Seventh Edition

Sourcing entity data and ensuring efficient and effective entity data management is a challenge for many financial institutions as volumes of data rise, more regulations require entity data in reporting, and the fight again financial crime is escalated by bad actors using increasingly sophisticated techniques to attack processes and systems. That said, based on best...