Wolters Kluwer Financial Services Offers Perspective on the Influence of Liquidity Costs on the Banking Industry

16 September 2014

New White Paper Provides Effective Strategies for Banks to Implement Liquidity Management    

Wolters Kluwer Financial Services, a leading worldwide provider of comprehensive risk management, compliance, finance and audit solutions to the financial services industry, today released a white paper entitled, "Liquidity Cost Based on HQLA Implied Reserve."

The Liquidity Coverage Ratio is the centerpiece of the liquidity management framework advocated by the Basel Committee on Banking Supervision. However, understanding how to calculate related costs and take follow-up action has become an emerging challenge for many banks.

Wolters Kluwer Financial Services' white paper will provide risk and compliance management professionals with an effective liquidity risk management framework to review. This paper also includes critical strategies for banks to consider when managing liquidity risk, including:

  • Relationships between liquidity cost and HQLA Implied Reserve - The decision-making process to raise funds and allocate assets is becoming a more complicated issue for banks in selecting sources of funding, setting a balanced structure between HQLA and loans, and calculating Liquidity Risk Cost for proper pricing.  
  • Basic assumptions and conditions - Banking institutions should re-check their plans for growth and some banks may consider downsizing to keep their total assets below a certain limit to avoid the obligation for LCR compliance.
  • Liquidity risk pricing approach based on HQLA Implied Reserve - Financial innovations to improve LCR will emerge. These include removing deposits with a high outflow rate from the balance sheet, so as to reduce HQLA required, and compensating balances as the transactional deposits with business relationships will also be required by banks.

"With the escalating LCR bottom line, liquidity cost will likely increase significantly," said Spark Wang Jun, senior regulatory intelligence expert at Wolters Kluwer Financial Services. "Operating patterns with lower liquidity costs, such as intermediary business and retail or SME deposits, will be favored; while interbank funding will be downscaled due to its high liquidity cost and HQLA Implied Reserve. As a result, financial innovations will be introduced and the regulatory environment will likely change."

Wolters Kluwer Financial Services' comprehensive liquidity risk solution combines a risk management, pricing, stress engine and regulatory reporting platform that enables firms to monitor, manage and report liquidity risk. In addition, the solution allows firms to build and develop a library of stress tests in accordance with regulator requirements.

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