Liquidity and economic capital
Context
- The current crisis has been characterised by substantial limitations on the sources of liquidity available. Barely any stress test anticipated such a length and depth of the economic turmoil.
- In response to the crisis, both the Basel Committee on Banking Supervision and Committee of European Banking Supervisors (CEBS) published recommendations on liquidity risk management and supervision, calling for a fundamental review of current liquidity management frameworks.
- Bank capital requirements rules are being revisited, the Basel Committee released proposed enhancements of the Basel II framework and the Solvency II Draft Directive is setting out the framework of a new economic risk based solvency regime, being the most far-reaching change to insurance companies in over 20 years.
- The markets have not waited for the new regulation, and have significantly increased their target solvency ratios significantly.
Risks and challenges
- Have you analysed the adequacy and diversification of funding sources diversification, the appropriateness of liquidity buffers? Are contingency funding plans aligned with the outcome of robust stress tests?
- How well is the business capitalised? Does it maintain and enhance stakeholder confidence?
- To what extent is the measurement of economic capital requirements embedded in the Enterprise Risk Management framework?
- What are the opportunities to optimize capital structure and fund real business opportunities?
- Is the cost of risk adequately reflected in the pricing of the products and services?
How Deloitte can help
Deloitte offers a wide range of actuarial and financial risk services, such as insurance ALM modeling, the valuation of a complex derivative, stress testing, (liability) cash flow forecasting and liquidity, capital and solvency optimization.
Deloitte can help reveal areas and opportunities to improve liquidity management and capital management and help understand exposures on counterparties. Furthermore we help clients re-designing risk exposure mitigating strategies and processes.
Deloitte supports clients in assessing business and products on economic capital requirements and helps them understand which business meets or has the potential to meet internal rates of return as to guide management on portfolio decisions.
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