Liquidity Risk - Top 5 issues UK banks must now take action on for FSA compliance

London - April 14, 2009 -

Algorithmics today outlined the Top 5 issues that banks must think about now to assess their policies, procedures and systems for compliance with the FSA's new liquidity risk regime, which will be finalized in April. The new rules are planned to be in force by October 2009 leaving banks little time to comply.

In Algorithmics' view, banks will need to assess their current capabilities, compare them to the FSA's expected requirements and then assess if they can bridge their liquidity risk gaps before the FSA's deadline.

The biggest priority for most firms will be the need to demonstrate simultaneous excellence in data management, cash flow/pricing models, optionality behavioural models, scenario generation, simulations and reporting.

Dr Mario Onorato, Senior Director of Balance Sheet Risk Management Solutions at Algorithmics and Honorary Senior Lecturer, Cass Business School in London, said: "The FSA's consultation paper (CP08/22) outlines a new regime for liquidity risk supervision in the UK and one that is likely to be followed around the world. UK banks face an aggressive implementation deadline that goes far beyond simple reporting and entails bank-wide systems necessary to meet these new requirements. I would urge institutions to consider if their current systems will be fit for purpose, where they are deficient, and to start planning their liquidity risk compliance projects - across finance, risk, ALM, treasury and IT departments. They need to start now if they are to be able to meet the deadlines."

The Top 5 issues that financial institutions should be thinking about for compliance with the expected new FSA rules are:

  • Management oversight: Do we have an effective liquidity risk management framework? It must include limit management, dissemination of risk-related information and management reporting.
  • Technology: Do we have a strong technical framework to deliver on the complex scenario generation, stress testing and dynamic simulations required under the FSA requirements? Can information from all potential sources across the institution be incorporated?
  • Functionality: Do our existing systems have the ability to analyze the risk from multiple perspectives? To do so requires the availability of multiple risk analytics, flexibility of scenario setting, definition of new information aggregation criteria, and an easy way to set up new set reports.
  • Timeframe: Do we have the ability to deploy in an aggressive timeframe - possibly as short as four months?
  • Best practice: Can we future-proof our investment in compliance and be prepared for further regulatory developments?

Algo Liquidity Risk is a liquidity risk management solution designed to meet all the FSA's current and new requirements. The solution includes pre-defined reports and pre-configured templates enabling extremely rapid deployment in any institution. With its superior liquidity risk analytics, framework for data management and pre-configuration, it can be deployed by the mandated October 2009 deadline.

Dr. Andrew Aziz, Executive Vice President of Risk Solutions at Algorithmics, added: "Financial institutions will be under increasing pressure from regulators to demonstrate they are measuring and managing their liquidity risk. The FSA's focus on stress testing as the basis of the new liquidity requirements aligns with our established comprehensive approach to managing liquidity risk. For many institutions, this will be an opportunity not just to comply with the requirements but to use this as the starting point to take a much more holistic view of the risk across the entire balance sheet, integrating market, credit and liquidity risk."

For more information about Algo Liquidity Risk, please visit:
www.algorithmics.com/EN/solutions/myinterests/alm.cfm

For Algorithmics' white papers on liquidity risk management see:
www.algorithmics.com/EN/publications/whitepapers/

For further information please contact:
Heather Smith
Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820
Mobile +44 (0) 7515 974223
E-mail Heather.smith@algorithmics.com  

Notes to Editors:

Algorithmics is the world's leading provider of enterprise risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. www.algorithmics.com

Turner Review, March 2009
Lord Turner, Chairman of the FSA, stated in the Turner Review of March 2009 that "managing bank liquidity risk is as important as capital/solvency risk management". The new regulatory framework, described in the FSA CP 08/22, will entail: a state of the art liquidity risk management infrastructure and process, with evidential provisions for presumptions of compliance; assessing liquidity adequacy by running FSA-defined stress tests; and producing a new set of supervisory reports under strict time schedules.

Algorithmics' Balance Sheet Risk Management solution looks at those risks in an institution that require simultaneous attention to, and coordination of, both sides of the balance sheet. This means coordinating funding (liability side of the Balance Sheet) with the investments (the asset side) in order to achieve the desired level of returns within the defined and accepted risk tolerance level. This enables management to make informed decisions affecting sustainable growth within balance sheet risk policies to achieve long term gains in capital value.

Liquidity risk management approach
Algorithmics' comprehensive approach to liquidity risk management, described as early as December 2007 in two white papers (see www.algorithmics.com/EN/publications/whitepapers/), very closely matches that of the FSA with regulatory liquidity requirements ultimately based on stress testing.

Algo Liquidity Risk is equipped with a state-of-the-art suite of functionalities especially designed in view of recent developments in best practice for liquidity risk management, including integration of market liquidity risk and monitoring of liquid assets, a flexible environment for stress testing, integration of behavioural models, and scenario-based dynamic simulation of future business. Liquidity risk analytics, both static and dynamic, are available, including ability to compare probability distributions of expected cash flows and liquid assets values to obtain an amount of liquid assets that is deemed sufficient to cover even unexpected cash outflows over a selected time horizon.

With its extensive instrument coverage and industry leading inventory of models and structured product building tools, Algo Liquidity Risk's can handle all assets, securities or derivatives, including the most complex products. Coupled with advanced simulation capabilities, any additions or refinements made to the modeling assumptions and scenarios are inherited throughout the solution, thereby ensuring ease of maintenance and consistency across measurement.

The flexibility of portfolio hierarchies and reporting views in Algo Liquidity Risk enables institutions to manage liquidity across legal entities, business lines and currencies. Moreover, the FTP functionality allows institutions to address the requirement for internal pricing of liquidity risk.

Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings' global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.

The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.

The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France. For additional information, please visit www.fitchratings.com www.algorithmics.com and www.fimalac.com 

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