Banks search for certainty on liquidity rules
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Banks search for certainty on liquidity rules

The deadline is approaching for the Basel intraday liquidity rules. But without a defined set of procedures, and concerns around costs, banks are moving forward reluctantly.

Intraday liquidity reporting was supposed to be in place by January 1, 2015, according to the deadline that the Basel Committee on Banking Supervision (BCBS) set out in April 2013. 

Banks would need to provide their daily maximum liquidity usage and the availability of liquidity at various points throughout the day, the committee said. They would also be required to demonstrate their liquidity during various stressed situations.

Catherine Banneux-large
 The tight timeline and potential lack of resources may lead banks to take a pragmatic approach

Catherine Banneux

However, as the date approaches, it seems apparent that it is more a guideline for when implementation should start, rather than a hard and fast deadline. What’s more, local regulators are being left to make up their own minds on what shape the rules will take. The consensus now seems to be that 2017 is a more realistic date to expect the work to be completed by.

Full implementation might still be two years away, but the 2015 deadline did at least push institutions into confronting the issue. The process of overhauling banking systems and changing how liquidity is reported was never going to be something done easily in a short space of time. However, there are concerns at how many institutions are still opting to wait and see what rules are agreed before they start to do anything about them.

This approach is creating an environment of uncertainty across jurisdictions and between the banks.

Catherine Banneux, senior market manager, banking, at Swift, says: “In most cases the reason for not having initiated a project is that the bank is waiting for more detailed requirements from the home regulator. Many countries have indeed not yet translated the tools into detailed implementation requirements.”

Swift’s latest data, gathered from 150 people across the financial industry, shows that 68% of banks have started work on projects related to BCBS monitoring tools. Of this 68%, just over half have started the initial evaluation and the remainder are in the implementation stage.

That leaves 32% of banks that have not started any process.

Divide developing

Differences are emerging between regions, split by how far along the process they have gone. A divide is also developing between nations, with some countries already taking steps to comply with the BCBS initiative. Singapore and Hong Kong, for example, have taken measures, but Canada seems to be taking the lead on the two-year extension by stating it will review the operational date for the new reporting tools, with its latest date set as January 1, 2017.

Swift’s research found that 64% of European banks have either initiated or begun implementing projects, compared with only 50% of Asian banks in the evaluation stage.

Starkly, 78% of banks that have started the implementation process are based in Europe or north America. Both those regions have strong regulatory frameworks in place already, but it demonstrates the gulf between different regions.

Christian Goerlach, head of balance sheet and liquidity management for financial institutions, global transaction banking at Deutsche Bank, says the Swiss banks have progressed particularly well in reaching the standards. In January 2014, Swiss regulator Finma sent a new liquidity circular, stating: “Banks must be able to demonstrate that they are in a position to reliably estimate and manage the consequences of an intraday stress event on the bank’s liquidity situation.”

As Goerlach points out, only a very small number of institutions in the country need to be brought up to standard.

All of this data needs to be consolidated into comprehensive reporting for the regulators. We need to be very intelligent
as an industry as to how we approach this

Christian Goerlach

While not every market has decided what will be implemented, Banneux says one reassuring point came out of Swift’s research: “It is worthwhile noting that not a single respondent ticked the box: ‘My home regulator has postponed the implementation deadline’.”

Goerlach says the hope is that a framework will be created that is operational across all jurisdictions. “While it is somewhat unrealistic to expect a completely level playing field globally at inception, the topic will organically develop in the same direction,” he says.

The market recognizes that collaboration will be needed to put in place a system that everyone can work to by 2017. Swift’s survey found that 89% of respondents thought collaboration was either essential or very important to reduce the overall implementation cost, and to increase the speed at which the data challenges can be solved.

“Collaboration can help, however there is also a need to start a project at individual level now,” says Banneux. “The tight timeline and potential lack of resources may lead banks to take a pragmatic approach, leveraging the infrastructure and data formats they already have in place to feed a central intraday liquidity transaction database.”

Although the collaborative approach might bring the answer in the long term, waiting for a solution to appear will not bring about the necessary results. Banks need to be pragmatic in implementing the change, yet flexible enough to adapt to another solution if necessary.

Christian Goerlach-large
Christian Goerlach, 
Deutsche Bank

“Banks cannot isolate themselves,” says Goerlach. “To maintain the intraday flow, there are a number of interdependencies when executing and returning payments. It is, therefore, in the interest of all parties involved, be it banks, regulators and clients, to ensure the implementation of a proper intraday framework.”

The consensus seems to be that as regulators are not providing a clear and final version of what they require, it is up to the banks themselves to reach a conclusion that all the parties are satisfied with.

“We are now in the phase where collaboration is key. Global clearing banks maintain thousands of nostro accounts for each other, and for each account we need to share minute-by-minute liquidity information,” says Goerlach. “All of this data then needs to be consolidated into comprehensive reporting for the regulators. We need to be very intelligent as an industry as to how we approach this.”

There is concern at the confusion caused by the lack of coherence across the global landscape, with each jurisdiction operating to its own standards.

Yera Hagopian, head of liquidity solutions at Barclays, says: “The issue becomes even more acute when you consider that generally banks do not self-clear in all the currencies in which they operate, therefore they depend on the services of a third-party provider. If each third-party provider is operating to different local rules, the consolidated picture could become very confused.”

Many banks are still some way off from having the systems in place to be able to provide up-to-the-minute reporting of the data, which may require wholesale changes to back-office infrastructure.

On the upside, decisions and risk analysis will be based
on accurate data rather than forecasts

Yera Hagopian

Considerable investment will be required to get up to speed. The question remains: how all of this will be paid for?

Banks could see it as part of their processes to get up to standard and cover the costs. Regulation is now part of day-to-day operations and must be factored into operational costs.

Or the expense could be passed on to clients, potentially through methods such as charging for each transaction, with those completed after a certain time in the day facing a larger charge than those completed earlier.

At present, there are peaks twice a day at 10:00 and 17:00. Implementing charges could bring a shift towards the morning.

That would depend on how quickly implementation is introduced, and whether banks decide to jump straight from their current position to operating beyond the existing requirements and providing real-time updates.

Two trains of thought

“There are two trains of thoughts on the speed of implementation,” says Goerlach. “One suggests we should not make any radical changes in the short term and carry out the reporting once a month as suggested by the Basel paper.”

The other, he says, “is that we should immediately implement state-of-the-art technology in order to deal with the necessary real-time reporting requirements, providing data here and now rather than just on an end-of-day basis”.

Nevertheless, even after an agreement is made, it will not be the end of the process.

“There is a risk that implementation of a real-time intraday liquidity management process could result in a long and complex project, preventing institutions from meeting their shorter-term mandatory requirements,” says Banneux. “Banks may therefore consider to take a pragmatic approach and approach the implementation of the tools as a first important step of a longer-term intraday liquidity management strategy.”

Ultimately, there will be benefits from operating on an intraday basis. Hagopian believes that intraday will form part of holistic liquidity management processes. She says: “On the upside, decisions and risk analysis will be based on accurate data rather than forecasts. Bank treasurers will need to get closer to their underlying businesses and understand the intraday impact that those business lines generate, and the economic impact of those profiles will be more accurately reflected in their services.”

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