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Liquidity risk and asset-liability management

Internal Liquidity Adequacy Assessment Process (ILAAP)

Eurozone banks have been grappling with the ILAAP since the introduction of the SSM, and UK banks for even longer. This core prudential requirement typically covers liquidity and funding risk management framework, funding strategy, strategy regarding liquidity buffers and collateral management, cost/benefit allocation mechanisms, intraday liquidity risk management, liquidity stress testing and liquidity contingency plans.

Avantage Reply has more than a decade of experience with ILAAP given its historical roots in the UK regulatory environment where Avantage has always had a strong presence. Our teams offer tailored ILAAP solutions depending on your business model and balance sheet.

OFFERINGS

  • Design and establish ILAAPs for new banks/entities:
    - Definition and design of ILAAP framework (including cascading within entities and operational implementation);
    - Executive and board training on regulators’ expectations.
  • Improve and Integrate:
    - Embed the ILAAP through banks; strategic-decision making process; 
    - Ensure the linkage between ILAAP and other key strategic processes - including trade-offs between capital and liquidity risk management (ICAAP/ILAAP/Recovery Plan options);
    - Design and implementation of ILAAP and liquidity risk governance framework (roles, responsibilities, segregation of duties, etc.)
    - Three lines of defence organisational governance - roles of first line, Treasury, Finance and Risk in ILAAP.
  • Improve methodologies:
    - Liquidity Stress Testing and Contingency Funding Plan;
    - Liquidity management framework – Liquidity adequacy, planning, monitoring and governance; Intraday Liquidity Risk Management; Independent validation of ILAAPs.
  • Improve risk and data aggregation:
    - BCBS239 compliant liquidity risk data aggregation and reporting, including consistency with regulatory reporting (COREP/FINREP/LCR/NSFR/AMM);
    - Addressing ECB OSI findings or audit matters in regards to liquidity risk;
    - Address ILAAP related technological and regulatory change management around payment services, privacy, crypto currencies or near-monies.

RELATED CASE STUDIES

ALM & Liquidity Management

Avantage Reply has substantial experience with ALM and liquidity risk management frameworks.

  • Following the CRR/CRD4 implementation, European banks have strengthened their liquidity risk management framework. Nevertheless, a lot of work remains to be done to enhance intraday liquidity management and liquidity stress testing.
  • Also, supervisory expectations have shifted to interest rate risk in the banking book; in particular the potential impacts on bank profitability of a prolonged low interest rate environment.

We have a strong understanding of the end to end process and can project-manage or advise on a range of challenges:

  • Design and implementation of an ALM operating model (strategy, governance, process, methodology, systems);
  • Design and implementation of ALM governance frameworks (roles, responsibilities, segregation of duties, mission statement, etc.);
  • Definition of an ALM strategy (Interest rate/Liquidity risk appetite and hedging strategy), Funds Transfer Pricing approach (‘FTP’) approach and performance optimisation;
  • Design of an interest rate risk or liquidity risk management framework (identifying, measuring, monitoring);
  • Methodology support in the design, implementation and validation of ALM models;
  • Definition and execution of liquidity stress testing approaches (including the link with the RAF, ILAAP, PPR);
  • Implementation and production of internal and regulatory reporting (liquidity, LCR,NSFR, monitoring tools).

RELATED CASE STUDIES