By Prof. Michael Eichhorn Hochschule Harz, University of Applied Sciences / Germany and Faculty, Bank Treasury Risk Management (BTRM) and Aaron Romano Associate Faculty, BTRM
Liquidity does not matter; until it matters, then it is the only thing that matters! For many banks, the COVID-19 crisis provided a timely reminder of this statement.
Imagine, as an ALCO Blog reader you are invited to speak at an industry conference on liquidity. Specifically, you are asked for your views on the question: How do you manage liquidity risk during a pandemic stress event?
What would your focus be? How do you open and close your speech?
What about the following proposal? In your opening remarks, you contextualize the term pandemic stress event for liquidity risk by asking the audience to recall what happened in March 2020:
You organise the remainder of your speech around the following themes:
These themes are illustrated in more detail in Figure 1. All themes have non-IT elements (e.g., staff, governance) and IT elements (e.g., data granularity, reporting tools).
Figure 1: Six focus themes for managing liquidity in a crisis
You close out by acknowledging that every crisis is different and individual banks are impacted in their own ways, e.g., depending on their business models. Therefore, no general, “one size fits all” statements are possible.
The moderator opens your session for Q&A. Someone asks: How fast can your risk infrastructure reporting system inform your management on changes in a crisis event?
What would be your answer? In our view, most banks require further infrastructure development to inform management of t+0 or even intraday on certain actuals (instead of t+1 and t+2) as part of the regular reporting. It is equally important to provide this information on a granular basis, i.e., by the driver and at the business level (as opposed to aggregation by entity or group-level). Delegates may comment that new technological developments (e.g., data lakes, open, interoperable platforms, big data, AI, agent-based modeling) enable enhanced capabilities.
After this and further questions, the moderator closes your session with his summary: Investments in infrastructure development, coupled with work on the focus as mentioned earlier, enable banks to mitigate a situation where liquidity is the only thing that matters. Would you agree?
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