In our October 2008 newsletter, John Soffronoff and I highlighted that the burdens of liquidity risk management (e.g., new regulatory demands to monitor and report liquidity to the regulators) would rapidly rise up for many if not all of our clients (see “Liquidity is King” below). We suggested then that our clients take their quarterly liquidity risk management meetings and make them monthly, or take their already monthly meetings and make them weekly.  For our very largest clients, we recommended a daily meeting, and it soon enough became intraday reporting that their regulatory authorities imposed.  

Due in part to extraordinary steps taken by the Federal Reserve and FDIC, which reduced fear of worsening “contagion” and averted outright “public panic,” the liquidity crisis of 2007-2009 seems to be behind us from a daily liquidity perspective.  BUT, the monitoring and reporting demands of the “crisis” are now being sustained by the Regulators in a great many cases, and so firms are making decisions as to how best to budget and build-out the supporting platforms.   

It is now nearly 30 months later, and if, for example you decided to take your ALCO meetings from monthly to weekly, in essence you quadrupled your workload in terms of: ALCO meeting time, preparations in advance of ALCO meetings, the dialogue with your Regulators, and the archiving of your minutes, etc.  Some of the larger firms actually manage over one terabyte of information on liquidity and market risk management each day in support of sophisticated analytical models and management reporting engines.  However, for most of our clients, the process is much more straightforward and spreadsheets are perfectly sufficient.  What we are seeing, as best practices, are:

  the development of access databases for liquidity tracking over time, and

  periodic validation that spreadsheets or access databases do not become corrupted, so that these processes retain their integrity and validity over time.

There seems to be industry consensus that the closer monitoring of liquidity is here to stay. What varies widely at this stage is the role of compliance from firm to firm in monitoring liquidity and discussing events with Regulators. 

This is because in the midst of the crisis, Compliance Officers were pulled into urgent discussions with Regulators, but now, generally speaking, Compliance Officers are seeking to focus again on their core competence: compliance risk management.  We heartily encourage that, because the burdens of compliance are expanding significantly across all product types due to Dodd-Frank, and the continued emphasis on BSA and OFAC.  We see new burdens in: consumer deposit products, loan origination, loan servicing, debt collection, trading desks, investment management, and so forth.   We have never seen so much burden being imposed simultaneously from Capitol Hill, and so, to keep it simple, we are now encouraging all clients to re-clarify the roles of their Compliance Officers --- they need to pay full attention to their core competencies due to this unprecedented time of change. Think of it as “Spring Cleaning” amongst your risk experts, and do call us if you feel you need some expert “Spring Training.”

By: James H. Wistman, MBA
Director