Liquidity Management Where Next

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Slide 2. Outline. 1. Markets2. Administrative Developments3. Assets Transfer Pricing. Slide 3. 1. Markets Has the tempest passed?

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Liquidity Management – Where Next? thirteenth April 2010 Martyn Hoccom RBS

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Overview 1. Markets 2. Administrative Developments 3. Stores Transfer Pricing

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Bid-ask spreads on chose resources Source: Bank of England, Speeches: The Debt Hangover, Haldane, Andrew. 1. Markets Has the tempest passed? – late proof from costs.. Bank CDS Prices The effects of the emergency were stark. Costs are lessening from in-emergency highs.. .. be that as it may, have not (yet) come back to pre-emergency levels. Source: Bank of England, Financial Stability Report, Dec 09 (b) Excludes Co-agent Financial Services. Significant UK banks' Libor spreads Source: Bank of England, Financial Stability Report, Dec 09

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And from volumes/volatilities. Worldwide Issuance of Corporate Bonds and Loans As costs spiked, volumes fell.. .. volatilities were enormous.. Source: Bank of England, Financial Stability Report, Dec 09 Global Issuance of Structured Financial Assets VIX Index Source: Bank of England, Financial Stability Report, Dec 09 Source: Bloomberg

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Remaining difficulties: large scale/political condition $/£ Public part bailouts have left government funds the world over weaker.. .. national bank accounting reports are generally expansive.. .. what's more, in a few nations, pending decisions include another component of vulnerability. Source: Bloomberg Government Debt as a % of GDP Central banks' monetary records as a rate of GDP Source: CIA, The World Factbook, 2009 Source: Bank of England, Financial Stability Report, Dec 09

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Refinancing/subsidizing challenges Major UK banks' developing financing: chose discount liabilities The managing an account area has a great deal of obligation to renegotiate, specifically as open segment plots close… .. in the meantime as working up fluid resource cradles. There is likewise a craving to renegotiate from more steady sources. Source: Bank of England, Financial Stability Report, Jun 09 Major UK Banks' Customer Funding Gap Aggregate Data from FSA Liquidity Risk Profile Source: Bank of England, Financial Stability Report, Jun 09

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2. Control Regulatory Avalanche FSA - Policy Statement 09/16 Strengthening Liquidity Standards , October 2009 Basel Committee on Banking Supervision – Principles for Sound Liquidity Risk Management and Supervision, September 2008 CEBS – Guidelines on Liquidity Buffers & Survival Periods, December 2009 CEBS – Guidelines on Stress Testing , December 2009 Basel Committee on Banking Supervision – International Framework for Liquidity Risk Measurement, Standards and Monitoring , December 2009 European Commission – CR04 , March 2010 CEBS - CP36: Guidelines on Liquidity Cost Benefit Allocation , March 2010 FRB – SR 10-6: Interagency Policy Statement on subsidizing and Liquidity Risk Management, March 2010 And auxiliary change recommendations that could affect on condition, eg: Obama proposition; constrains on size and/or capacities Macro-prudential arrangement/instruments Recovery and determination arranges – Living wills

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FSA Individual Liquidity Adequacy Assessment FSA's new administration for liquidity chance administration Purpose is to guarantee that Banks and budgetary foundations have adequate fluid advantages for survive times of worry In times of stress, banks encounter surges of assets which are driven by the way of the assets (discount/retail) and practices.. .. what's more, can prompt to an amazingly short survival period keeping in mind the end goal to cover the outpourings banks must hold fluid resources Liquid resources incorporate qualified resources - national bank parities and government securities ILAA: self-and supervisory-appraisal Result of the ILAA: Individual Liquidity Guidance 'Screen' administration for 2010 – 2 week and 3 month limits

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FSA Backstop Limits 1. Two-Week Wholesale Mismatch

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FSA Backstop Limits 2. Three-Month Liquid Asset Ratio

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Behaviourlisation "All history is bunk" - Henry Ford Status of behaviourlisation versus forward looking judgment in stress models Differentiate involvement in emergency versus ordinary economic situations Nature of liquidity stress

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Basel ≥100% ≥ 100% European Commission expect to concur for draft EU law in 2010 in accordance with BSCS timetable FSA will guarantee consistency of UK administration with definite EU controls

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The Liquidity Coverage Ratio (LCR) The LCR intends to guarantee that a bank keeps up a satisfactory level of unhampered, excellent resources which are adequate to cover outpourings in a 30 day time of intense here and now push situation characterized by the controllers and which involves: a noteworthy minimization of the establishment's open FICO assessment; an incomplete loss of stores lost unsecured discount financing a huge increment in secured subsidizing hair styles increments in subordinate insurance calls considerable approaches legally binding and non-authoritative shaky sheet exposures, including submitted credit and liquidity offices

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The LCR has two parts 1. Numerator: The Liquidity Buffer Whether the thin or expansive definition is utilized resources must incorporate just those unrestricted resources which meet the criteria of being effortlessly and instantly changed over into money at practically no loss of significant worth. They should along these lines have the accompanying principal attributes: Low Credit and Market Risk Ease and Certainty of valuation Low connection with dangerous resources Listed on a trade Active and sizable market Presence of conferred market producers Low market focus Evidence that advantages have been utilized as a part of flight to quality

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LCR Denominator 2. Denominator: Cash outpourings The Committee has been very prescriptive in changing over legally binding streams into conduct streams with the end goal of the estimation: Unsecured stores Secured subsidizing Drawdown of unutilised submitted credit and liquidity 100% of liquidity needs connected with downsize triggers in regard of extra guarantee requirements for up to and including a 3 score minimize A rate (to be concurred by nearby controllers) of the expanded liquidity needs identified with changes in market valuation of subordinate contracts. Where the insurance is non center an extra 20% of the estimation of the guarantee ought to be held because of the potential value unpredictability of the basic securities. 100% of liquidity presentation to abcp, conductors, SIVs, and other such financing offices 100% of developing subsidizing of benefit sponsored securities developing in the 30 day time span

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The Net Stable Funding Ratio (NSFR) The NSFR means to expand the measure of medium and long haul financing to bolster illiquid resources Objectives include: lessen level of dependence on here and now financing guarantee that speculation managing an account inventories, wobbly sheet exposures, securitisation pipelines supported with no less than at least stable liabilities restrict over-dependence on discount subsidizing energize better evaluation of liquidity hazard crosswise over on and reeling sheet things balance conceivable "bluff edge" impacts of utilizing 1m period in the LCR

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RBS Net Stable Funding Ratio Published in RBS yearly report and records 2009 HSBC has distributed industry wide marker in research paper

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NSFR Unintended Impacts?! Large scale Less development change – more term financing => credit creation? Small scale 0% variables for secured acquiring => decreases advertise? Corporate securities subsidized in CP all the more positively exchanged => builds showcase?

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3. Reserves Transfer Pricing Organizational Structure Board/GALCO Market get to Function Divisions Capital Markets Money Markets Retail Liquidity FTP Center Wealth Markets Wholesale Corporate Execution Clearing Etc. Chance Control: Limits Mismatch Gaps Liquidity Cover

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Balance Sheet Liquidity Breakdown Liquidity Behavioral Assumptions Need to guide items to developments Basis for mapping to be resolved

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Liquidity Cost Benefit Allocation "1.The liquidity money saving advantage designation component is an essential piece of the entire liquidity administration structure. All things considered, the system ought to be predictable with the structure of administration, hazard resilience and basic leadership handle. 2.The liquidity money saving advantage portion instrument ought to have a legitimate administration structure supporting it. 3.The yield from the assignment system ought to be effectively and legitimately utilized and proper to the business profiles of the organization. 4.The extent of use of inside costs ought to be adequately complete to cover every critical piece of benefits, liabilities and shaky sheet things in regards to liquidity. 5.The inward costs ought to be controlled by vigorous systems, considering the different components required in liquidity hazard." CEBS Principles