Liquidity Risk Management - LCR, NSFR, Stress Testing and Liquidity Pricing

Duration:
2 days
Location:
Prague, NH Hotel Prague
  • Liquidity Risk, Liquidity Crises and Regulatory Reponses
  • Modelling and Measuring Funding Liquidity Risk
  • Calculating and Implementing the Liquidity Coverage Ratio
  • Preparing for the Net Stable Funding Ratio (NSFR)
  • Modelling and Measuring Market Liquidity Risk
  • Liquidity Stress Testing
  • Effective Liquidity Pricing and FTP under LCR and NSFR
  • Building a New Business Model under the LCR and NSFR Regime
A two-day practical and comprehensive course on measuring, modelling and managing of liquidity risk in a post-crisis regulatory landscape.

The purpose of this course is to give you a comprehensive understanding of methods and tools for modelling, measuring and managing liquidity risk with particular focus on the challenges posed by the new Basel III liquidity ratios.

We start with a review of the events and that have lead to the realisation of the need for strongly improved liquidity risk management practices. We explain regulatory responses which include the introduction of new liquidity ratios (LCR and NSFR), rigorous stress testing requirements, and heightened reporting standards. We also discuss the possible business impacts of these changes.

We then explain methods for measuring and monitoring liquidity risk under the Basel III regulatory regime. We explain and demonstrate how cash flows arising from assets, liabilities and off-balance sheet items can be projected over various time horizons and under different stress assumptions. We thoroughly explain the Basel III liquidity ratios, LCR and NSFR, and we explain and demonstrate how these ratios can be calculated, implemented, reported and disclosed. We also discuss how banks can best prepare for the NSFR, which will become an effective requirement in 2018. Importantly, we discuss how this ratio will impact banks' funding and trading business.

Further, we discuss the importance of liquidity risk as a source of market risk. We propose a method for measuring market liquidity risk that is consistent with the VaR approaches underlying Basel III and we explain the concept of "liquidity horizons" under the proposed revised treatment of trading book risk.

Further, we explain how stress testing can be used as a tool in developing a complete picture of an institution's liquidity risk profile. We give an overview of best practices in liquidity stress testing, and we explain and demonstrate how stress testing techniques are used in conjunction with the calculation of the LCR. We also explain how macro-economic stress testing is used by regulators and/or central banks to gauge the financial system's vulnerability to liquidity shocks.

Finally, we explain how liquidity risk can effectively managed under the new regulatory regime. We discuss possible changes to banks' business models to cope with the LCR and NSFR challenges, and we present a number of liquidity management tools, including "contingency planning" and financing instruments. We also explain how liquidity risk should be priced consistently and how FTP can be used as a tool to promote optimal use of liquidity under the LCR/NSFR regime.

09.15 - 12.00 Liquidity Risk, Liquidity Crises and Regulatory Reponses

  • Liquidity Risk and its Role the Global Crisis
  • Funding Liquidity Risk vs. Market Liquidity Risk
  • Regulatory Initiatives - LCR, NSFR and the Trading Book Review
  • Differences between Global Liquidity Regulations

Modelling and Measuring Funding Liquidity Risk

  • Components of Funding Liquidity Risk
    • Refinancing risk, call risk and time risk
  • Assessing Liquidity Using Balance Sheet Indicators
    • Loan-to-Deposit Ratio
    • Liquid Assets/Total Liabilities
    • Liquid Assets/Short Term Liabilities
    • Basic Surplus Deficit
  • Assessing Liquidity Risk Using Cash Flow Projections
    • Items with deterministic payment profiles
    • Items with market-related cash flows
    • Items with "random" cash flows
    • Liquidity at Risk (LaR)
  • Workshop: Assessing Liquidity Risk at "NoHope Bank"

12.00 - 13.00 Lunch

13.00 - 16.30 Calculating and Implementing the Liquidity Coverage Ratio (LCR)

  • Objective of the LCR and use of HQLA
  • HQLA Classifications and their Potential Impacts
  • Calculation Total Net Cash Inflows and Outflows
  • Application issues for the LCR
  • Monitoring and Reporting Requirements
    • Aggregating and cleansing data for LCR reporting
    • Monitoring intraday liquidity
    • Disclosure requirements
  • Comprehensive Case Study: Calculating LCR and Completing the LCR common Disclosure Template and COREP Template at "NoHope Bank"

Preparing for the Net Stable Funding Ratio

  • Objective and Definition of the NSFR
  • Timeline and Key Activities During the Observation Phase
  • Possible Impacts of the NSFR on Banks' Lending and Trading Business
  • Comprehensive Case Study: Planning for the NSFR at "NoHope Bank"

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Modelling and Measuring Market Liquidity Risk

  • The Relationship between Market and Liquidity Risk
  • Two Broad Groups of Market Liquidity Risk Measures
    • Spread measures
    • Impact measures
  • Measuring Market Liquidity Risk in Terms of Value-at-Risk
  • Regulatory Applications
    • The IRC and CRM measures under Basel 2.5
    • The incorporation of Market Liquidity Risk under the proposed new treatment of the trading book
  • Comprehensive Case Study: Measuring Market Liquidity Risk in the Trading Book at "NoHope Bank"

Liquidity Stress Testing

  • Sources and Quantities of Liquidity Stress
  • The Importance of Liquidity Buffers
  • Bottom-Up and Top-Down Approaches to Liquidity Stress Testing
  • Regulators Stress Testing Methods for Liquidity Risk
  • Best Practices in Banks' Liquidity Stress Tests
  • Comprehensive Case Study: Using Stress Testing in LCR Calculation at "NoHope" Bank

12.00 - 13.00 Lunch

13.00 - 16.30 Effectively Managing Liquidity Risk under LCR and NSFR

  • Building a New Business Model under the LCR and NSFR Regime
  • Sound Practices for Liquidity Risk Management
  • A Rating Agency's Perspective on Liquidity Risk Management
  • Practical Tools for Liquidity Management
    • Contingency funding planning
    • Liquidity and underwriting facilities
    • Using MTNs, CDs, CPs, asset-backed CPs and Repos
  • Effective Liquidity Pricing and FTP under LCR and NSFR
    • Defining liquidity costs and the pricing factors
    • How the new ratios will affect liquidity costs
    • Understanding and using liquidity cost curves
    • Using Fund Transfer Pricing (FTP) to promote optimal use of liquidity
    • Liquidity pricing for specific asset and liability classes
    • Liquidity pricing for contingent liquidity
  • Comprehensive Case Study: Using Liquidity Pricing and FTP under LCR and NSFR at "NoHope Bank"

Evaluation and Termination of the Seminar

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