New Regulations to Drive Additional Investment in Liquidity Management
Sybase, an SAP company, and Aite Group have published a report examining the liquidity risk management (LRM) challenges that banks and financial institutions must face in the post-financial crisis era.
“Liquidity risk management has become a high-priority issue for banks. It is the most significant of all business risks in that the inability to fund a position imminently can lead directly to insolvency,” said John Jay, senior research analyst, Aite Group. “Financial institutions must adopt a comprehensive approach reflecting the significance of LRM to the organisation’s success.”
Global regulatory bodies have released a number of recent and comprehensive policy statements, proposals, and guidelines for financial institutions associated with LRM seeking to minimise liquidity risk. Banks and money managers will need to comply with business and compliance realities. In addition to regulatory issues, a dominant industry pain point is around legacy silos. Liquidity risk data sources span an entire enterprise and many banks use an inefficient spreadsheet-based LRM approach drawing from multiple data sources.
“The single most consistent and significant challenge identified by practitioners is that of gathering information from disparate systems,” said Sinan Baskan, senior director of business development, financial services, Sybase. “Lack of timely and accurate visibility into all components influencing bank liquidity hinders a financial institution’s ability to manage liquidity risk – for many large banks, the number of systems containing liquidity information is upwards of 25.”
Liquidity risks go beyond funding a loan or a security purchase. Complex derivatives, illiquid securities, ongoing transactions-based business relationships, volatile funding markets, as well as regulatory and investor scrutiny demand that financial firms incorporate liquidity risk-related data and process in their risk management scheme. Strengthening the LRM infrastructure will fortify a firm’s overall risk and compliance framework.
Developing a robust LRM infrastructure has become a necessity to most financial institutions, and the heavy hand of regulation may force organisations to invest in LRM technologies in the not-so-distant future. To address the pain points listed above, the report recommends the following approach: