The 6th Annual Risk Americas Convention – America’s premier gathering of risk management professionals – returns to New York Hilton Midtown from 23-24 May 2017. This year’s convention features four tracks: The Future of Risk Management, Stress Testing & Model Risk, Liquidity Risk & Funding, and Operational Risk & ERM.
Presenting Liquidity Risk & Funding is Christian Pichlmeier, Head of Liquidity Risk, at Union Bank. The European caught up with Christian to discuss the post-implementation of Enhanced Prudential Standards for foreign banking organisations operating with intermediate holding companies and the liquidity repercussions.
Why is it so important to review the post implementation impact of Enhanced Prudential Standards (EPS)?
Christian Pichlmeier: While the large domestic institutions in the US were expected to adhere to EPS much earlier, the real test for foreign banking organisations (FBOs) began in July 2016. Regulatory authorities have started to look into how FBOs interpreted the rules and whether they fulfill the spirits of the requirements. The larger FBOs are waiting for the results of the latest horizontal exam by the Federal Reserve Bank and I expect we will learn that the focus needs to be much more on liquidity than it was in the past. FBOs have improved their framework in respect to capital and CCAR but certainly do have some catch-up to do on liquidity.
Briefly outline the role of intermediate holding companies (IHCs) and highlight the structural changes that liquidity managers need to take in to consideration.
CP: The role of the IHC is critical, as it needs to be sufficiently funded to cover the liquidity risk across the US. While in the past, institutions had a large number of entities with its own idiosyncratic liquidity risk, it is now expected that funding and liquidity risk is managed cohesively from the holding company perspective. Moreover, the Federal Reserve Bank has a direct impact on the liquidity risk, as it is the primary regulator for the IHC.
How do you envisage the industry evolving, especially as this is such as busy period for liquidity managers?
CP: Again, answering the question from a FBO perspective, the large foreign entities have built up a much stronger liquidity function in 2016 through the implementation of EPS. The Fed has reviewed in particular how liquidity stress assumptions are derived. Moreover, liquidity reporting has kept liquidity managers very busy. The topics for the near future in my opinion will be a further development of liquidity stress scenarios to reflect scenarios assuming no governmental support in a liquidity crisis. I also see an extended focus on intraday liquidity and collateral management. Lastly, funds transfer pricing will become a much more centralised focus as one of the key incentives for liquidity risk management is to ensure that front office business managers understand the liquidity risk they are exposing the firm through appropriate cost allocation.