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Press article: Insights into a crucial subject – Deloitte’s liquidity risk survey


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The worldwide financial turmoil in 2007/2008 was in essence a liquidity crisis. Financial markets did not fulfill their primary function sufficiently – bringing providers and consumers of liquidity together – and created an unprecedented systemic crisis. In the aftermath, institutions and regulators around the world have considerably increased their efforts to prevent history from repeating itself in the future. The CSSF Circular 09/403 on sound liquidity risk management is far from being the end of the story for the Luxembourg credit institutions. Many of its principle based guidelines, such as the composition of liquidity buffers and the definition of survival periods, are now being codified by the CSSF.

Liquidity – the ability to honor one’s payment obligations on time - is vital for any player in the banking business. In this very sensitive context, where ambiguous information or even rumors can rapidly become a self-fulfilling prophecy, Deloitte’s risk management team launched a survey, intended to provide Luxembourg based banks with a benchmarking opportunity. This study is a snap-shot of best market practices for liquidity risk management in the Luxembourg financial centre. All participants completing Deloitte’s liquidity risk questionnaire, have received a detailed summary of the aggregate findings and the benchmarking of their individual practices against the practices of the industry. We would like to detail some of our core findings below.

The problem of liquidity risk is as old as the banking business itself and has been well-known ever since. However, the development of technical tools for the actual risk management of liquidity has been insufficient. This applies to the identification of liquidity risk drivers and - as a natural consequence - the modeling of their (inter-) dependencies.

Most participants have taken the necessary qualitative steps to address liquidity risk, but as usual, the devil is in the detail: 89% of institutions have approved a liquidity risk policy, but in fact only a minority put confidence in their ability to identify the real drivers of liquidity risk. Consequently, monitoring of liquidity risk indicators and related escalation procedures are insufficiently implemented. This is presumably the reason why only one institution has been able to launch its contingency funding plan during the most severe liquidity crisis, although the majority of participants also had similar plans at their disposal. However, even if some drivers of the liquidity risk are well known and clearly reflect a reality of the Luxemburg financial centre, many institutions express little ability to withstand liquidity concerns from their parent company, for example.

Quantitatively, liquidity risk modeling is still in its infancy - be it for the stochastic modeling of cash-flows, or a scientific assessment of asset liquidity. Yet this is especially important during times of crisis where also liquidity for certain types of assets became a true issue. Interestingly, the vast majority (87,5%) of institutions neglect the asset side and off-balance sheet positions, in their scenarios for the liquidity stress test, though these can have a large adverse impact. During the last two years, increasing resources have clearly been allocated to address liquidity risk. The utilized IT tools, however, are not sufficiently mature. In approximately 50% of the cases, Microsoft Office based solutions are used by the surveyed banks to support liquidity risk management.

Beyond the well-known structural specifics of the Luxembourg financial centre, the survey results primarily point out the accumulated need to improve liquidity risk practices. However, the increasing awareness as to the potential amplitude of liquidity risk is clearly illustrated. This is undoubtedly the first and most important step for these institutions in their attempt to tackle this risk.

Contacts

Name:
Xavier Zaegel
Company:
Deloitte Luxembourg
Job Title:
Partner - Capital Markets/Financial Risk Leader
Phone:
+352 451 452 748
Email
xzaegel@deloitte.lu
Name:
Company:
Job Title:
Phone:
Email
Name:
Hubert Hafner
Company:
Deloitte Luxembourg
Job Title:
Manager - Capital Markets/Financial Risk
Phone:
+352 451 454 035
Email
hhafner@deloitte.lu

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