Liquidity Risk A challenging issue for the supervisory community Gerhard Stahl, BaFin.
-
date post
21-Dec-2015 -
Category
Documents
-
view
223 -
download
0
Transcript of Liquidity Risk A challenging issue for the supervisory community Gerhard Stahl, BaFin.
Liquidity Risk | Seite 2
Agenda
• History
• CFI and internal models – Where we stand
• Plans for the future – Where to go
Liquidity Risk | Seite 3
Liquidity Risk – What happened so far?
History
From supervisory side:
• Basel paper of 2000
• Joint Forum exercise
• European stock takings via the Groupe de Contact
• Stock take of the ECB, via the Banking Supervision Committee, on mainly macro prudential aspects of Liquidity Risk
• National authorities: OCC, FSA, BaFin (internal models), …
• Pillar II issue under Basel II
From banking side:
• IIF 44 recommendations
Liquidity Risk | Seite 4
Spot Futures, FRA‘s Swaps
Options Exotics, Structured
Deals Structured credit, credit derivatives
Gapping &Duration
MtM & modified duration
First-order Sensitivities
Volatility, delta, gamma, vega, theta
Correlations, basis risk
Model risk (inc. smiles, calibration)
CFI and Internal Models
Liquidity Risk | Seite 5
Modeling Liquidity Risk
Metallgesellschaft (Miller vs. Ross)
S&L Crisis
Liquidity risk is of 2nd order
Data quality (better then CR worse then MR)
LIqVaR
ARIMA modeling unscheduled payments
Liquidity Risk | Seite 6
Basel II & Solvency II: Similarities and Differences
Similarities / Synergies
similar products: • structured products
• interest rate and credit derivatives
similar tools and models:
• market risk (Black-Karasinski)
• credit risk (CreditMetrics)
Banks / Basel II insurers / Solvency II
• input-oriented
• partial models (market and ratings)
• shorter horizons
• aggregation of risk numbers
• in market risk: thousands of risk drivers or simple „earnings at risk”
• absolute risk measure
• output-oriented
• holistic modeling
• longer horizons
• aggregation of distributions
• King’s road: small number of accumulation events, which explain losses at the group level
• risk relative to a benchmark (RNP)
Liquidity Risk | Seite 7
What is a good measure of risk?
1. SM are weakly coherent
2. Backtest-ability
3. Clear substantial meaning
4. Robustness
5. good scaling behavior (time, level of significance, portfolios, ...) - risk silos, different users
6. Valuation of assets is key (marked to market, marked to model, best estimate,…)
7. Multi-period vs. one-period models
8. USE TEST
Liquidity Risk | Seite 8
Economic Capital – Stakeholders
• Bondholders
• Shareholders
• Regulators
• Rating agencies
• Managers
- different time horizons(!!)
- different levels of significance (!)
- complexity of the firm, e.g. a holding (!!!) => copula, consistent
modeling,….
Liquidity Risk | Seite 9
What is Risk Management Process about?
OBJECTIVESStrategy and KPIs
TIME COST
EMBED VALUES
Impact
Risks
ERM/CRSA
Threats Opportunities
Management
Identification
Assessment
Review
Risks
Riskpolicy
Peoplebuy-in
CRO
Boardsponsor
Liquidity Risk | Seite 10
The Basel approach on liquidity
• Berlin meeting in May 2006 – Committee should exercise an „intelligent“ stock take on current liquidity regimes of Members
• December meeting 2006 – final agreement on establishing the Working Group on Liquidity
• Tough time table – stock take to be finished until the end of 2007
• First meeting in January
• Drafting session for the Questionnaire
Questionnaire fully taken over by Groupe de Contact
Questions of other groups considered
No double work
Liquidity Risk | Seite 11
A brief outline of the work I
• Objectives – what do the standards seek to achieve:
Level of resilience to risk
Externalities/market failures addressed
• Practice – what standards are applied and how
‘Pillar 1 approaches’ – quantitative standards
‘Pillar 2 approaches’ – qualitative standards
Validation of firms risk management/modeling
‘Pillar 3 approaches’ – Disclosure requirements
Interaction with capital requirements
Liquidity Risk | Seite 12
A brief outline of the work II
• Experience with application of standards
For domestic firms
For branches, subsidiaries, and cross-border firms
• Relationship with other financial infrastructure (“context”)
General supervisory approach
Central bank operations and policies
Payment system design
Collateral management
Capital requirements
Structure of domestic and (relevant parts of) international banking system
Asset market dynamics
Credit risk transfer markets
Liquidity Risk | Seite 13
Deliverables
• Better understanding of the outcome delivered by current liquidity regimes for domestic and cross-border firms
• To provide the Committee with an analysis of:
the reasons for the current diversity of approach
the advantages and disadvantages of diversity
an assessment of options for future work
Liquidity Risk | Seite 14
Work streams and literature survey
• What are the diverse standards trying to achieve? How much underlying uniformity is there?
• How is context (e.g. structure of banking sector, central bank policy, design of payment system) influencing regimes?
• How has the changing financial system affected liquidity risk?
• Analysis of consequences of diversity
For firms
For ‘day-to-day’ supervision (resilience to mild stress)
For crisis management (resilience to extreme stress)
• Literature survey to complete the picture from the scientific point of view
Liquidity Risk | Seite 15
9 Aprildeadline for
the responses to the questionnaire
April - Juneevaluation ofthe responses
December delivery to the
Basel Committee
June - Octoberdrafting of the
report
nearly parallel timetable of GdC‘s Liquidity Task Force
Timeline
Work on Liquidity Risk
The Basel Committee has to decide,whether further work on liquidity risk will be treated within the Basel
context.