risk management presentation april 22 2013

7/28/2019 Risk Management Presentation April 22 2013

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International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the

week's agenda, and what is nextDear Member,

I really enjoyed this paper from the Financial

Conduct Authority in UK with title:

Applying behavioural economics at theFinancial Conduct Authority

WOW! Now I know what was missing from the old FSA!They deserved to die.

I love behavioural economics.

This is one of the few areas we can explain that everybody (outside thefinancial services industry of course) is too stupid or has lost his mind, soit is not likely to understand what we do.

My summary of the paper: A fool and his money are soon parted.

It is science, of course.

And, it is a really excellent paper, and you should study it. I t couldbecome the manual for every expert witness in the financial services. All

the good excuses are there.

It this paper, one of the questions is: Why consumer choice in retailfinancial products and services is particularly prone to errors?

International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
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Some answers:

1.Many products are inherently complex for most people.

{My understanding: Most people are too small, too poor, too stupid}

To add insult to the injury the paper continues:

Faced with complexity, consumers can simplify decisions in ways thatlead to errors, such as focusing only on headline rates

2.Decisions may require assessing risk and uncertainty. People aregenerally bad (even terrible) intuitive statisticians and are prone tomaking systematic errors in decisions involving uncertainty.

{My understanding: People are generally bad (even terrible) statisticians,ok, but can statistician predict the future using the history repeats itselfassumption?}

3. Some products permit little learning from past mistakes.

{My understanding: Even when people can learn from past mistakes inthe financial markets, we can always make different mistakes.}

Read more (about how not to exploit continuously the fact that the othersare stupid) at Number 2.

Again, it is an excellent paper.

I love Figure 5especially what describes the MARKET

It has never crossed my mind that we can describe the market in this way:

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Also

What is Intraday Liquidity Risk?

We have the official definition from the Basel Committee on Banking

Supervision (BCBS)

Intraday Liquidity Risk is the risk that a bank fails to manage itsintraday liquidity effectively, which could leave it unable to meet apayment obligation at the time expected, thereby affecting its ownliquidity position and that of other parties.

Yes, we have a final rule, the introduction of monitoring tools for intradayliquidity. Under Pillar 2.

Why Pillar 2?

According to the paper (at N umber 1 below), the tools are beingintroduced for monitoring purposes only.



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Internationally active banks will be required to apply these tools. National

supervisors will determine the extent to which the tools apply to

non-internationally active banks within their jurisdictions.

However, banks and supervisors are not required to disclose thesereporting requirements publicly.

Public disclosure is not intended to be part of these monitoring tools.

For the eyes of the supervisors onlyPillar 2 these Basel iii secrets

But also:

National supervisors will determine the extent

Another national discretionanother opportunity to say bye-byeharmonized approach to implement Basel I I I .

Read more at Number 1 below.

Welcome to the Top 10 list.

Best Regards,

George LekatisPresident of the IARCPGeneral Manager, Compliance LLC1200 G Street NW Suite 800,Washington DC 20005, USATel: (202) 449-9750Email: [email protected]

Web: www.risk-compliance-association.com

HQ: 1220 N. Market Street Suite 804,Wilmington DE 19801, USATel: (302) 342-8828

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BIS: Basel Committee on Banking Supervision (BCBS)

Monitoring tools for intraday liquiditymanagement - final document, April 2013

This document is the final version of the Committee'sMonitoring tools for intraday liquidity management.

It was developed in consultation with the Committee on Payment andSettlement Systems to enable banking supervisors to better monitor abank's management of intraday liquidity risk and its ability to meetpayment and settlement obligations on a timely basis.

Applying behavioural economics at theFinancial Conduct AuthorityApril 2013

Kristine Erta, Stefan Hunt, Zanna I scenko,

Will Brambley

A rapidly growing literature on behavioural economics shows that someerrors made by consumers are persistent and predictable.

This raises the prospect of firms designing business models that do notfocus on competing on price and quality.

Behavioural economics enables regulators to intervene in markets moreeffectively, and in new ways, to counter such business models and secure

better outcomes for consumers.



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Thematic peer review on the FSBPrinciples for Reducing Reliance

on Credit Rating Agency (CRA)Ratings

The goal of the Principles is to end mechanistic reliance on CRA ratingsby banks, institutional investors and other market participants.

Stress testing bankswhat have we learned?

Speech by Mr Ben S Bernanke, Chairman of theBoard of Governors of the Federal Reserve System, atthe Maintaining financial stability: holding a tigerby the tailfinancial markets conference, sponsoredby the Federal Reserve Bank of Atlanta, StoneMountain, Georgia

APRA releases consultationpackage on disclosure ofcomposition of capital andremuneration

The Australian Prudential Regulation Authority (APRA) today released a

consultation paper and draft prudential standard relating to Pillar 3disclosures on the composition of capital and on remuneration byauthorised deposit-taking institutions (ADIs) in Australia.



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ESMA 2013 Regulatory WorkProgramme

ESMA has published its 2013 RegulatoryWork Programme which is based on its 2013 Work Programme, publishedin October 2012, and provides a detailed breakdown of the of theindividual workstreams as outlined in the 2013 Work Programme.

Islamic finance and the European challenge

Opening address by Mr Ignazio Visco, Governor of theBank of I taly, at the IFSB Forum TheEuropean challenge, organized by the IslamicFinancial Services Board (IFSB) and hostedby the Bank of Italy, Rome, 9 April 2013.

COMMODITY FUTURES TRADINGCOMMISSION, SECURITIES AND EXCHANGECOMMISSION

Identity Theft Red Flags RulesJoint final rules and guidelines.

http://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2012-631_0.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/system/files/2013-455.pdfhttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programmehttp://www.esma.europa.eu/news/ESMA-2013-Regulatory-Work-Programme


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Department of H ome AffairsSUMMARY OF RESPONSES TO TH E

CONSULTATION ON TH E MONEYLAUNDERING AND TERRORISTFINANCING CODE 2013

The Department of Home Affairs (DHA) issued the Money Launderingand Terrorist Financing Code 2013 with a view to replacing the Proceedsof Crime (Money Laundering) Code 2010 and the Prevention of TerroristFinancing Code 2011.

Regulation of Cross-Border OTC DerivativesActivities: Finding the Middle Ground

By Chairman Elisse Walter, U.S. Securities andExchange Commission, American Bar AssociationSpring Meeting, Washington D.C.



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BIS: Basel Committee on BankingSupervision (BCBS)

Monitoring tools for intraday liquiditymanagement - final document, April2013

This document is the final version of theCommittee's Monitoring tools for intradayliquidity management.

It was developed in consultation with the

Committee on Payment and SettlementSystems to enable banking supervisors tobetter monitor a bank's management of intraday liquidity risk and itsability to meet payment and settlement obligations on a timely basis.

Over time, the tools will also provide supervisors with a betterunderstanding of banks' payment and settlement behaviour.

The framework includes:

the detailed design of the monitoring tools for a bank's intradayliquidity risk

stress scenarios

key application issues

the reporting regime

Management of intraday liquidity risk forms a key element of a bank'soverall liquidity risk management framework.

As such, the set of seven quantitative monitoring tools will complementthe qualitative guidance on intraday liquidity management set out in theBasel Committee's 2008 Principles for Sound Liquidity Risk Managementand Supervision.



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It is important to note that the tools are being introduced for monitoringpurposes only and that internationally active banks will be required toapply them.

National supervisors will determine the extent to which the tools apply tonon-internationally active banks within their jurisdictions.

Basel II I: The Liquidity Coverage Ratio and liquidity risk monitoringtools (January 2013), which sets out one of the Committee's key reforms tostrengthen global liquidity regulations does not include intraday liquiditywithin its calibration.

The reporting of the monitoring tools will commence on a monthly basisfrom 1 January 2015tocoincide with the implementation of the LCR

reporting requirements.

An earlier version of the framework of monitoring tools was issued forconsultation in July 2012.

The Committee wishes to thank those who provided feedback andcomments as these were instrumental in revising and finalising themonitoring tools.

Monitoring tools for intraday liquidity managementApril 2013

Introduction

1. Management of intraday liquidity risk forms a key element of a banksoverall liquidity risk management framework.

In September 2008, the Basel Committee on Banking Supervision (BCBS)published its Principles for Sound Liquidity Risk Management and

Supervision (the Sound Principles), which provide guidance for banks ontheir management of liquidity risk and collateral.

Principle 8 of the Sound Principles focuses specifically on intradayliquidity risk and states that:



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Abank should actively manage its intraday liquidity positions and risksto meet payment and settlement obligations on a timely basis under bothnormal and stressed conditions and thus contribute to the smoothfunctioning of payment and settlement systems.

2. Principle 8 identifies six operational elements that should be includedin a banks strategy for managing intraday liquidity risk.

These state that a bank should:

(i)have the capacity to measure expected daily gross liquidity inflows andoutflows, anticipate the intraday timing of these flows where possible, andforecast the range of potential net funding shortfalls that might arise atdifferent points during the day;

(ii)have the capacity to monitor intraday liquidity positions againstexpected activities and available resources (balances, remaining intradaycredit capacity, available collateral);

(iii)arrange to acquire sufficient intraday funding to meet its intradayobjectives;

(iv)have the ability to manage and mobilise collateral as necessary toobtain intraday funds;

(v)have a robust capability to manage the timing of its liquidity outflowsin line with its intraday objectives; and

(vi)be prepared to deal with unexpected disruptions to its intradayliquidity flows.

3.In January 2013, the BCBS published Basel I I I: The Liquidity CoverageRatio and liquidity risk monitoring tools, which sets out one of theCommitteeskey reforms to strengthen global liquidity regulations.

The objective of the Liquidity Coverage Ratio (LCR) is to promote theshort-term resilience of the liquidity risk profile of banks, but does not

include intraday liquidity within its calibration.

4.The BCBS, in consultation with the Committee on Payment andSettlement Systems (CPSS) has developed a set of quantitative tools toenable banking supervisors to monitor banksintraday liquidity risk and



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their ability to meet payment and settlement obligations on a timely basisunder both normal and stressed conditions.

The monitoring tools will complement the qualitativeguidance in theSound Principles.

5. Given the close relationship between the management of banksintraday liquidity risk and the smooth functioning of payment andsettlement systems,

4 the tools will also be of benefit to central bank or other authoritiesresponsible for the oversight of payment and settlement systems(overseers).

It is envisaged that the introduction of monitoring tools for intradayliquidity will lead tocloser co-operation between banking supervisors andthe overseers in the monitoring of bankspayment behaviour.

6.It is important to note that the tools are being introduced formonitoring purposes only.

Internationally active banks will be required to apply these tools.

These tools may also be useful in promoting sound liquidity management

practices for other banks, whether they are direct participants of a

large-value payment system (LVPS) or use a correspondent bank to settlepayments.

National supervisors will determine the extent to which the tools apply tonon-internationally active banks within their jurisdictions.

7.Consistent with their broader liquidity risk managementresponsibilities, bank management will be responsible for collating andsubmitting the monitoring data for the tools to their banking supervisor.

It is recognised that banks may need to liaise closely with counterparts,including payment system operators and correspondent banks, to collatethese data.



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However, banks and supervisors are not required to disclose thesereporting requirements publicly.

Public disclosure is not intended to be part of these monitoring tools.

8. The following sections of this document set out:

The definitions of intraday liquidity and intraday liquidity risk and theelements that constitute a banks intraday liquidity sources and usage

The detailed design of the intraday liquidity monitoring tools

The intraday liquidity stress scenarios

The scope of application of the tools

The implementation date and reporting frequency

I I . Definitions and sources and usage of intraday liquidity

A. Definitions

9. For the purpose of this document, the following definitions will applyto

the terms stated below.

Intraday Liquidity: funds which can be accessed during the businessday, usually to enable banks to make payments in real time

Business Day: the opening hours of the LVPS or of correspondentbanking services during which a bank can receive and make payments ina local jurisdiction

Intraday Liquidity Risk: the risk that a bank fails to manage its intraday

liquidity effectively, which could leave it unable to meet a paymentobligation at the time expected, thereby affecting its own liquidityposition and that of other parties.



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Time-specific obligations: obligations which must be settled at aspecific time within the day or have an expected intraday settlementdeadline.

B. Intraday liquidity sources and usage

10. The following sets out the main constituent elements of a banksintraday liquidity sources and usage.

(The list should not be taken as exhaustive.)

(i) Sources

Own sourcesReserve balances at the central bank;

Collateral pledged with the central bank or with ancillary systems thatcan be freely converted into intraday liquidity; Unencumbered assets on a banks balance sheet that can be freelyconverted into intraday liquidity;Secured and unsecured, committed and uncommitted credit linesavailable intraday; Balances with other banks that can be used for intraday settlement.

Other sources Payments received from other LVPS participants;

Payments received from ancillary systems; Payments received through correspondent banking services.

(ii) Usage

Payments made to other LVPS participants; Payments made to ancillary systems; Payments made through correspondent banking services;

Secured and unsecured, committed and uncommitted credit linesoffered intraday; Contingent payments relating to a payment and settlement systemsfailure (eg as an emergency liquidity provider).



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11. I n correspondent banking, some customer payments are made acrossaccounts held by the same correspondent bank.

These paymentsdo not give rise to an intraday liquidity source or usagefor the correspondent bank as they do not link to the payment andsettlement systems.

However, these internalised paymentsdo have intraday liquidityimplications for both the sending and receiving customer banks andshould be incorporated in their reporting of the monitoring tools.

I I I. The intraday liquidity monitoring tools

12. A number of factors influence a banksusage of intraday liquidity in

payment and settlement systems and its vulnerability to intraday liquidityshocks.

As such,no single monitoring tool can provide supervisors with sufficientinformation to identify and monitor the intraday liquidity risk run by abank.

To achieve this, sevenseparate monitoring tools have been developed(see Table 1).

As not all of the tools will be relevant to all reporting banks, the tools havebeen classified in three groups to determine their applicability as follows:

Category A: applicable to all reporting banks;

Category B: applicable to reporting banks that provide correspondentbanking services; and

Category C: applicable to reporting banks which are direct participants.



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A. Monitoring tools applicable to all reporting banks

(i) Daily maximum intraday liquidity usage

13. This tool will enable supervisors to monitor a banks intraday liquidityusage in normal conditions.

It will require banks to monitor the net balance of all paymentsmade andreceived during the day over their settlement account, either with thecentral bank (if a direct participant) or over their account held with acorrespondent bank (or accounts, if more than one correspondent bank isused to settle payments).

The largest net negative position during the business day on theaccount(s), (ie the largest net cumulative balance between paymentsmade and received), will determine a banks maximum daily intradayliquidity usage.

The net position should be determined by settlement time stamps (or theequivalent) using transaction-by-transaction data over the account(s).

The largest net negative balance on the account(s) can be calculated afterclose of the business day and does not require real-time monitoringthroughout the day.



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14. For illustrative purposes only, the calculation of the tool is shown infigure 1.

Apositive net position signifies that the bank has received morepayments than it has made during the day.

Conversely, anegative net position signifies that the bank has made morepayments than it has received.

For direct participants, the net position represents the change in itsopening balance with the central bank.

For banks that use one or more correspondent banks, the net positionrepresents the change in the opening balance on the account(s) with its

correspondent bank(s).



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15.Assuming that a bank runs a negative net position at some pointintraday, it will need access to intraday liquidity to fund this balance.

The minimum amount of intraday liquidity that a bank would need tohave available on any given day would be equivalent to its largest negativenet position.

(In the illustration above, the intraday liquidity usage would be 10 units.)

16.Conversely, when a bank runs a positive net cumulative position atsome point intraday, it has surplus liquidity available to meet its intradayliquidity obligations.

This position may arise because the bank is relying on payments received

from other LVPS participants to fund its outgoing payments.

(In the illustration above, the largest positive net cumulative positionwould be 8.6 units.)

17.Banks should report their three largest daily negative net cumulativepositions on their settlement or correspondent account(s) in the reportingperiod and the daily average of the negative net cumulative position overthe period.

The largest positive net cumulative positions, and the daily average of thepositive net cumulative positions, should also be reported.

As the reporting data accumulates, supervisors will gain an indication ofthe daily intraday liquidity usage of a bank in normal conditions.

(ii) Available intraday liquidity at the start of the business day

18. This tool will enable supervisors to monitor the amount of intraday

liquidity a bank has available at the start of each day to meet its intradayliquidity requirements in normal conditions.

Banks should report both the three smallest sums by value of intradayliquidity available at the start of each business day in the reporting period,



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and the average amount of available intraday liquidity at the start of eachbusiness day in the reporting period.

The report should also break down the constituent elements of theliquidity sources available to the bank.

19.Drawing on the liquidity sources set out in Section II B above, banksshould discuss and agree with their supervisor the sources of liquiditywhich they should include in the calculation of this tool.

Where banks manage collateral on a cross-currency and/ or cross-systembasis, liquidity sources not denominated in the currency of the intradayliquidity usage and/ or which are located in a different jurisdiction, maybe included in the calculation if the bank can demonstrate to the

satisfaction of its supervisor that the collateral can be transferred intradayfreely to the system where it is needed.

20.As the reporting data accumulates, supervisors will gain an indicationof the amount of intraday liquidity available to a bank to meet its paymentand settlement obligations in normal conditions.

(iii) Total payments

21. This tool will enable supervisors to monitor the overall scale of a

banks payment activity.

For each business day in a reporting period, banks should calculate thetotal of their gross payments sent and received in the LVPS and/ or, whereappropriate, across any account(s) held with a correspondent bank(s).

Banks should report the three largest daily values for gross payments sentand received in the reporting period and the average daily figure of grosspayments made and received in the reporting period.

(iv) Time-specific obligations

22. This tool will enable supervisors to gain a better understanding of abanks time specific obligations.



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Failure to settle such obligations on time could result in financial penalty,reputational damage to the bank or loss of future business.

23. Banks should calculate the total value of time-specific obligations thatthey settle each day and report the three largest daily total values and theaverage daily total value in the reporting period to give supervisors anindication of the scale of these obligations.

B. Monitoring tools applicable to reporting banks that providecorrespondent banking services

(i) Value of payments made on behalf of correspondent bankingcustomers

24.This tool will enable supervisors to gain a better understanding of theproportion of a correspondent banks payment flows that arise from itsprovision of correspondent banking services.

These flows may have a significant impact on the correspondent banksown intraday liquidity management.

25.Correspondent banks should calculate the total value of paymentsthey make on behalf of all customers of their correspondent banking

services each day and report the three largest daily total values and thedaily average total value of these payments in the reporting period.

(ii) Intraday credit lines extended to customers

26. This tool will enable supervisors to monitor the scale of acorrespondent banks provision of intraday credit to its customers.

Correspondent banks should report the three largest intraday credit linesextended to their customers in the reporting period, including whether

these lines are secured or committed and the use of those lines at peakusage.



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C. Monitoring tool applicable to reporting banks which aredirect participants

(i) Intraday throughput

27. This tool will enable supervisors to monitor the throughput of a directparticipantsdaily payments activity across its settlement account.

Direct participants should report the daily average in the reporting periodof the percentage of their outgoing payments (relative to total payments)that settle by specific times during the day, by value within each hour ofthe business day.

Over time, this will enable supervisors to identify any changes in a bankspayment and settlement behaviour.

IV. Intraday liquidity stress scenarios

28.The monitoring tools in Section I I I will provide banking supervisorswith information on a banks intraday liquidity profile in normalconditions.

However, the availability and usage of intraday liquidity can change

markedly in times of stress.

In the course of their discussions on broader liquidity risk management,banks and supervisors should also consider the impact of a banksintraday liquidity requirements in stress conditions.

As guidance, four possible (but non-exhaustive) stress scenarios havebeen identified and are described below.

Banks should determine with their supervisor which of the scenarios arerelevant to their particular circumstances and business model.

29.Banks need not report the impact of the stress scenarios on themonitoring tools to supervisors on a regular basis.



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They should use the scenarios to assess how their intraday liquidity profilein normal conditions would change in conditions of stress and discusswith their supervisor how any adverse impact would be addressed eitherthrough contingency planning arrangements and/ or their wider intradayliquidity risk management framework.

Stress scenarios

(i) Own financial stress: a bank suffers, or is perceived to besuffering from, a stress event

30.For a direct participant, own financial and/ or operational stress mayresult in counterparties deferring payments and/ or withdrawing intradaycredit lines.

This, in turn, may result in the bank having to fund more of its paymentsfrom its own intraday liquidity sources to avoid having to defer its ownpayments.

31.For banks that use correspondent banking services, an own financialstress may result in intraday credit lines being withdrawn by thecorrespondent bank(s), and/ or its own counterparties deferringpayments.

This may require the bank having either to prefund its payments and/ orto collateralise its intraday credit line(s).

(ii) Counterparty stress: a major counterparty suffers an intradaystress event which prevents it from making payments

32. A counterparty stress may result in direct participants and banks thatuse correspondent banking services being unable to rely on incomingpayments from the stressed counterparty, reducing the availability ofintraday liquidity that can be sourced from the receipt of thecounterpartyspayments.



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(iii) A customer banksstress: a customer bank of acorrespondent bank suffers a stress event

33. A customer banksstress may result in other banks deferring

payments to the customer, creating a further loss of intraday liquidity atits correspondent bank.

(iv) Market-wide credit or liquidity stress

34.A market-wide credit or liquidity stress may have adverse implicationsfor the value of liquid assets that a bank holds to meet its intradayliquidity usage.

A widespread fall in the market value and/ or credit rating of a banksunencumbered liquid assets may constrain its ability to raise intradayliquidity from the central bank.

In a worst case scenario, a material credit downgrade of the assets mayresult in the assets no longer meeting the eligibility criteria for the centralbanks intraday liquidity facilities.

35.For a bank that uses correspondent banking services, a widespread fallin the market value and/ or credit rating of its unencumbered liquid assets

may constrain its ability to raise intraday liquidity from its correspondentbank(s).

36.Banks which manage intraday liquidity on a cross-currency basisshould consider the intraday liquidity implications of a closure of, oroperational difficulties in, currency swap markets and stresses occurringin multiple systems simultaneously.

Application of the stress scenarios

37.For theown financial stress and counterparty stress, all reportingbanks should consider the likely impact that these stress scenarios wouldhave on their daily maximum intraday liquidity usage, available intraday



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liquidity at the start of the business day, total payments and time-specificobligations.

38.For thecustomer banks stress scenario, banks that providecorrespondent banking services should consider the likely impact thatthis stress scenario would have on the value of payments made on behalfof its customers and intraday credit lines extended to its customers.

39.For themarket-wide stress, all reporting banks should consider thelikely impact that the stress would have on their sources of availableintraday liquidity at the start of the business day.

40.While each of the monitoring tools has value in itself, combining theinformation provided by the tools will give supervisors a comprehensive

view of a banks resilience to intraday liquidity shocks.

Examples on how the tools could be used in different combinations bybanking supervisors to assess a banks resilience to intraday liquidity riskare presented in Annex 3.

V. Scope of application

41. Banks generally manage their intraday liquidity risk on asystem-by-system basis in a single currency, but it is recognised that

practices differ across banks and jurisdictions, depending on theinstitutional set up of a bank and the specifics of the systems in which itoperates.

The following considerations aim to help banks and supervisorsdetermine the most appropriate way to apply the tools.

Should banks need further clarification, they should discuss the scope ofapplication with their supervisors.

(i) Systems

42. Banks which are direct participants to an LVPS can manage theirintraday liquidity in very different ways.



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Some banks manage their payment and settlement activity on asystem-by-system basis.

Others make use of direct intraday liquidity bridgesbetween LVPS,which allowexcess liquidity to be transferred from one system to anotherwithout restriction.

Other formal arrangements exist, which allow funds to be transferredfrom one system to another (such as agreements for foreign currencyliquidity to be used as collateral for domestic systems).

43. To allow for these different approaches, direct participants shouldapply a bottom-upapproach to determine the appropriate basis forreporting the monitoring tools.

The following sets out the principleswhich such banks should follow:

As a baseline, individual banks should report on each LVPS in whichthey participate on a system-by-system-basis;

I f there is a direct real-time technical liquidity bridge between two ormore LVPS, the intraday liquidity in those systems may be consideredfungible.

At least one of the linked LVPS may therefore be considered an ancillarysystem for the purpose of the tools;

I f a bank can demonstrate to the satisfaction of its supervisor that itregularly monitors positions and uses other formal arrangements totransfer liquidity intraday between LVPS which do not have a directtechnical liquidity bridge, those LVPS may also be considered as ancillarysystems for reporting purposes.

44.Ancillary systems (eg retail payment systems, CLS, some securitiessettlement systems and central counterparties), place demands on abanks intraday liquidity when these systems settle the banks obligationsin an LVPS.



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Consequently, separate reporting requirements will not be necessary forsuch ancillary systems.

45.Banks that use correspondent banking services should base theirreports on the payment and settlement activity over their account(s) withtheir correspondent bank(s).

Where more than one correspondent bank is used, the bank should reportper correspondent bank.

For banks which access an LVPS indirectly through more than onecorrespondent bank, the reporting may be aggregated, provided that thereporting bank can demonstrate to the satisfaction of its supervisor that itis able to move liquidity between its correspondent banks.

46.Banks which operate as direct participants of an LVPS but which alsomake use of correspondent banks should discuss whether they canaggregate these for reporting purposes with their supervisor.

Aggregation may be appropriate if the payments made directly throughthe LVPS and those made through the correspondent bank(s) are in thesame jurisdiction and same currency.

(ii) Currency

47.Banks that manage their intraday liquidity on a currency-by-currencybasisshould report on an individual currency basis.

48.If a bank can prove to the satisfaction of its supervisor that it managesliquidity on a cross-currency basis and has the ability to transfer fundsintraday with minimal delayincluding in periods of acute stressthenthe intraday liquidity positions across currencies may be aggregated forreporting purposes.

However, banks should also report at an individual currency level so thatsupervisors can monitor the extent to which firms are reliant on foreignexchange swap markets.



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49. When the level of activity of a banks payment and settlement activityin any one particular currency is considered de minimis with theagreement of the supervisor23 a reporting exemption could apply andseparate returns need not be submitted.

(iii) Organisational structure

50.The appropriate organisational level for each banks reporting of itsintraday liquidity data should be determined by the supervisor, but it isexpected that the monitoring tools will typically be applied at a significantindividual legal entity level.

The decision on the appropriate entity should consider any potentialimpediments to moving intraday liquidity between entities within a

group, including the ability of supervisory jurisdictions to ring-fenceliquid assets, timing differences and any logistical constraints on themovement of collateral.

51.Where there are no impediments or constraints to transferring intradayliquidity between two (or more) legal entities intraday, and banks candemonstrate this to the satisfaction of their supervisor, the intradayliquidity requirements of the entities may be aggregated for reportingpurposes.

(iv) Responsibility of home and host supervisors

52. For cross-border banking groups, where a bank operates in LVPSand/ or with a correspondent bank(s) outside the jurisdiction where it isdomiciled,both home and host supervisors will have an interest inensuring that the bank has sufficient intraday liquidity to meet itsobligations in the local LVPS and/ or with its correspondent bank(s).

The allocation of responsibility between home and host supervisor will

ultimately depend upon whether the bank operating in the non-domesticjurisdiction does so via a branch or a subsidiary.



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For a branch operation

The home (consolidated) supervisor should have responsibility formonitoring through the collection and examination of data that itsbanking groups can meet their payment and settlement responsibilities inall countries and all currencies in which they operate.

The home supervisorshould therefore have the option to receive a full setof intraday liquidity information for its banking groups, covering bothdomestic and non-domestic payment and settlement obligations.

The host supervisor should have the option to require foreign branchesin their jurisdiction to report intraday liquidity tools to them, subject tomateriality.

For a subsidiary active in a non-domestic LVPS and/ orcorrespondent bank(s)

The host supervisor should have primary responsible for receiving therelevant set of intraday liquidity data for that subsidiary.

The supervisor of the parent bank (the home consolidated supervisor)will have an interest in ensuring that a non-domestic subsidiary has

sufficient intraday liquidity to participate in all payment and settlementobligations.

The home supervisor should therefore have the option to requirenon-domestic subsidiaries to report intraday liquidity data to them asappropriate.

VI. Implementation date and reporting frequency

53.The reporting of the monitoring tools will commence on a monthly

basis from 1 January 2015 to coincide with the implementation of the LCRreporting requirements.

54. Sample reporting templates can be found in Annex 2.



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As noted above, the tools apply to internationally active banks.

National supervisors will determine whether other banks should apply thereporting requirements.

Banks should also agree with their supervisors the scope of applicationand reporting arrangements between home and host authorities.

55. If customer banks are unable to meet this implementation deadlinebecause of data availability constraints with their correspondent bank(s),consideration may be given by supervisors to phasing-in theirimplementation to a later date (preferably no later than 1 January 2017).

Annex 1

Practical example of the monitoring tools

The following example illustrates how the tools would operate for a bankon a particular business day.

Assume that on the given day, the banks payment profile and liquidityusage is as follows:

1. Direct participant

Details of the banks payment profile are as followings:



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Payment A: 450Payment B: 100to settle obligations in an ancillary systemPayment C: 200which has to be settled by 10 amPayment D: 300on behalf of a counterparty using some of a 500 unitunsecured credit line that the bank extends to the counterpartyPayment E: 250

Payment F: 100The bank has 300 units of central bank reserves and 500 units of eligiblecollateral.

A(i) Daily maximum liquidity usage:largest negative net cumulative positions: 550 unitslargest positive net cumulative positions: 200 units

A(ii) Available intraday liquidity at the start of the business day:300 units of central bank reserves + 500 units of eligible collateral(routinely transferred to the central bank) = 800 units

A(iii) Total payments:Gross payments sent: 450+100+200+300+250+100 = 1,400 unitsGross payments received: 200+400+300+350+150 = 1,400 units

A(iv) Time-specific obligations:200 + value of ancillary payment (100) = 300 units

B(i) Value of payments made on behalf of correspondent bankingcustomers:300 units

B(ii) Intraday credit line extended to customers:Value of intraday credit lines extended: 500 unitsValue of credit line used: 300 units

C(i) Intraday throughput



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2. Bank that uses a correspondent bank

Details of the banks payment profile are as followings:Payment A: 450Payment B: 100Payment C: 200which has to be settled by 10amPayment D: 300Payment E: 250Payment F: 100which has to be settled by 4pmThe bank has 300 units of account balance at the correspondent bank and500 units of credit lines of which 300 units unsecured and also

uncommitted.

A(i) Daily maximum intraday liquidity usage:largest negative net cumulative positions: 550 unitslargest positive net cumulative positions: 200 units

A(ii) Available intraday liquidity at the start of the business day:300 units of account balance at the correspondent bank + 500 units ofcredit lines (of which 300 units unsecured and uncommitted) = 800 units

A(iii) Total payments:

Gross payments sent: 450+100+200+300+250+100 = 1,400 unitsGross payments received: 200+400+300+350+150 = 1,400 units



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A(iv) Time-specific obligations:200 + 100 = 300 units



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Annex 3

Combining the tools

The following is a non-exhaustive set of examples which illustrate howthe tools could be used in different combinations by supervisors to assessa banks resilience to intraday liquidity risk:

(1)Time-specific obligations relative to total payments and availableintraday liquidity at the start of the business day

If a high proportion of a banks payment activity is time critical, the bankhas less flexibility to deal with unexpected shocks by managing itspayment flows, especially when its amount of available intraday liquidityat the start of the business day is typically low.

In such circumstances the supervisor might expect the bank to haveadequate risk management arrangements in place or to hold a higherproportion of unencumbered assets to mitigate this risk.

(2)Available intraday liquidity at the start of the business day relative tothe impact of intraday stresses on the banks daily liquidity usage

If the impact of an intraday liquidity stress on a banks daily liquidityusage is large relative to its available intraday liquidity at the start of the



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business day, it suggests that the bank may struggle to settle payments ina timely manner in conditions of stress.

(3)Relationship between daily maximum liquidity usage, availableintraday liquidity at the start of the business day and the time-specificobligations

If a bank misses its time-specific obligations, it could have a significantimpact on other banks.

If it were demonstrated that the banks daily liquidity usage was high andthe lowest amount of available intraday liquidity at the start of thebusiness day were close to zero, it might suggest that the bank ismanaging its payment flows with an insufficient pool of liquid assets.

(4)Total payments and value of payments made on behalf ofcorrespondent banking customers

If a large proportion of a banks total payment activity is made by acorrespondent bank on behalf of its customers and, depending on thetype of the credit lines extended, the correspondent bank could be morevulnerable to a stress experienced by a customer.

The supervisor may wish to understand how this risk is being mitigated

by the correspondent bank.

(5) Intraday throughput and daily liquidity usage:

If a bank starts to defer its payments and this coincides with a reductionin its liquidity usage (as measured by its largest positive net cumulativeposition), the supervisor may wish to establish whether the bank hastaken a strategic decision to delay payments to reduce its usage ofintraday liquidity.

This behavioural change might also be of interest to the overseers giventhe potential knock-on implications to other participants in the LVPS.



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Applying behavioural economics at theFinancial Conduct Authority

April 2013

Kristine Erta, Stefan Hunt, Zanna I scenko, Will Brambley

A rapidly growing literature on behavioural economics shows that someerrors made by consumers are persistent and predictable.

This raises the prospect of firms designing business models that do notfocus on competing on price and quality.

Behavioural economics enables regulators to intervene in markets moreeffectively, and in new ways, to counter such business models and securebetter outcomes for consumers.

The UK Parliament has created the Financial Conduct Authority (FCA)and has given it an additional objective and duty to promote effectivecompetition, which we believe should be on price and quality (rather thanon false focal points or strategies to exclude rivals at point-of-sale).

To achieve this, the FCA will first need to undertake integrated analysis ofeconomic markets.

In other words, it will need to understand how information problems,consumersbehavioural errors and firmscompetitive strategies combineto produce observed market outcomes.

This involves some change from the existing practice of most conductregulators, with one of the biggest changes relating to greater focus onunderstanding consumer behaviour.

This paper first sets out what behavioural economics tells us aboutconsumer decision-making in financial markets.

This is based on an extensive review of the available literature.

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risk management presentation april 22 2013

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