Banks, Basel and beyond

In April 2013, the Basel Committee on Banking Supervision (BCBS) published its recommendations for a new liquidity monitoring framework for banks in a paper, ‘Monitoring Tools for Intraday Liquidity Management’. In this Q&A interview, Nadine Chakar, head of product development and strategy, global collateral services, BNY Mellon, explains how banks are adapting to the new regime.

What are the key new requirements for banks’ intraday liquidity management processes? The liquidity monitoring framework has been finalised at the international level and now needs to be implemented in individual jurisdictions around the world. US bank regulators have not yet proposed or finalised implementing regulations, so the framework is not yet effective for US banking organisations such as BNY Mellon. In common with other banks, BNY Mellon continues to take measures to monitor intraday liquidity risk as a matter of safety and soundness.

The BCBS framework recommends that all internationally active banks monitor and report daily maximum intraday liquidity usage, available intraday liquidity at the start of each business day, total payments made, and time-specific obligations. Banks that provide correspondent banking services have additional obligations to monitor and report the total value of payments made on behalf of customers and intraday credit lines extended to customers. Banks that are direct participants must also monitor and report intraday throughput. Finally, banks should assess the impact of various stress scenarios on their intraday liquidity profiles.

Will this lead to changes in payment practices? These new requirements may cause bigger behavioural changes than operational changes. Requiring banks to report intraday liquidity positions to regulators – and concerns that such reporting might translate to binding constraints – may incentivise banks to manage intraday liquidity with different results. Banks may slow the pace of scheduled payments or even withhold scheduled payments so their reported results appear stronger, causing more concentrations of late day activity. Failing to harmonise reporting requirements across jurisdictions might also lead to arbitrage.

What do banks need to do to be well prepared for the new requirements? Timeliness and efficiency become more important with the increasing focus on intraday positions. As such, there is an increasing need for large players to directly participate in payments systems and develop their own monitoring systems, and there is an increasing need for high quality, timely, and efficient intermediation for smaller players. Preparedness for the BCBS requirements varies dramatically across the industry. BNY Mellon, for example, will become a member of CHAPS, the UK automated clearing house, and will directly clear sterling, where historically we have used a settlement agent. While the BCBS requirements will impose significant operational burdens on some banks, others, such as BNY Mellon, already have intraday liquidity monitoring systems in place at a global level across currencies. Similarly, some banks may need to reallocate staff and resources to achieve appropriate controls and management. BNY Mellon has a designated head of intraday liquidity and an intraday liquidity committee to help coordinate these activities.

What tools can banks use to help with the new requirements? Outsourcing may be an option for smaller players. Internally-developed liquidity monitoring systems are necessary for the larger players. Banks have a variety of tools available to monitor and manage intraday liquidity. Historically, the regulators have been very involved in intraday liquidity and systemic issues of intraday settlements so while the BCBS tools are ‘new’, they don’t necessarily involve wholesale changes for large settlement banks.

How will banks prove they have effective intra-day liquidity management and monitoring systems in place? Banks may develop daily oversight of intraday liquidity indicators and governance and control processes. As mentioned, BNY Mellon has established an intraday liquidity committee that focuses on daily operations and monitoring. Bank regulators will continue to evaluate bank systems during the examination and supervision process.

What related regulations will impact liquidity management issues for banks? Banks will be watching for national implementation of these Basel intraday liquidity monitoring standards. The US bank regulators have indicated that their analysis is under way and may incorporate many or most of the BCBS recommendations, but this is yet to be confirmed.

It is important to put these liquidity monitoring requirements in context: the liquidity regulatory burden is growing across many fronts and intraday management is only a part of this. Meanwhile, there is a concomitant de-emphasis on the incremental burden of US implementation of BCBS tools in addition to existing US requirements. In other words, BNY Mellon is well prepared and we do a lot of what will be expected in respect of liquidity management already.

Broadly speaking, there is an increased regulatory focus on quantitative and qualitative liquidity standards. For example: the US Federal Reserve has finalised the Dodd-Frank Act section 165 rules, which imposes several new liquidity risk management requirements on bank holding companies, including managing a liquidity buffer, conducting liquidity stress tests, and developing a contingency funding plan; the Federal Reserve is collecting additional liquidity data through 4G and 5G liquidity reporting; the Basel Committee finalised the liquidity coverage ratio which the US is close to implementing; and the Basel Committee recently proposed the net stable funding ratio.