Vital for banks to manage liquidity risk

PETALING JAYA: Banks risk failure when they are not able to maintain sufficient liquidity even though they may have good asset quality, strong earnings and adequate capital, according to SAS Malaysia.

“To address this concern, financial institutions should have a well-communicated strategy for day-to-day liquidity risk management, apart from the need to establish robust methodologies for monitoring, measuring and managing their liquidity funding strategies,” said SAS Institute Sdn Bhd (SAS Malaysia) director for financial services industry Helen Lim.

“They should also conduct regular liquidity risk stress tests to assess the adequacy of their funding practices and liquidity buffers,” she said in an e-mail interview.

SAS Malaysia, a subsidary of US-based SAS Institute Inc, provides a range of business intelligence services, from data integration and data warehouse management solutions to end-user business intelligence tools and enterprise applications.

According to Lim, the goal of liquidity risk management is to identify potential future funding problems.

Some banks may need to improve on their information technology system to enable them to calculate liquidity positions at various required time periods, she said.

Managing liquidity risk well was critical for banks, said KPMG Business Advisory Services executive director and head of financial services and financial risk management John Lee.

Stressing this point, he said: “Next to capital, the solvency of a bank is dependent on its liquidity. Without funds, banks will not be able to fund their business, lending or investing.

“The recent market turmoil has highlighted some gaps in liquidity risk management, especially from the point of view of market liquidity, vis-a-vis finding buyers and/or sellers for financial instruments.”

He said one enhancement that banks should focus on was market liquidity risk management. This involved banks keeping watch on the liquidity of their financial instruments and ensuring that they were able to find other means of liquidating these instruments, Lee said.

Lim of SAS Malaysia categorises the challenge of implementing a sound liquidity risk management system into four areas – analytical, time, data and reporting.

The analytical challenge encompasses having the right solution for providing a proper cash-flow model, calculating appropriate liquidity buffers, measuring influences of primary risks on liquidity, and being able to define stress scenarios easily.

The time challenge relates to having the right IT infrastructure and processes in place to conduct critical calculations on a daily or even intraday basis.

The data challenge involves being able to describe the institution’s business and organisation completely, while delivering information on a daily basis when required.

Lastly, the reporting challenge revolves around having the right solutions in place to monitor the defined measures and indicators together with a new collateral management system and flexible ad hoc reporting capabilities.

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