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The recent financial crisis revealed just how poorly many banks manage their liquidity risks.
For banks, managing liquidity has always been complex and difficult—just how difficult was cruelly revealed by the recent financial crisis. The shortcomings of the industry’s liquidity risk management plans and models were devastatingly obvious.
Now as financial institutions begin to pick up the pieces and plan for growth, it is critical that they assess what happens and learn from their mistakes. Managing liquidity risk remains a critical core competence for banks. Therefore, banks in pursuit of high performance will need to develop liquidity risk management that addresses and responds to shifting market realities—including the unexpected.
To help prevent another liquidity crisis, new regulations have already been issued. US regulators have published the Interagency Policy Statement on Funding and Liquidity Risk Management, which is incorporated in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bank for International Settlements has made 13 recommendations to help banks upgrade their liquidity risk management, and Basel III has also proposed formal liquidity rations.
The overall effect of these and future developments will be to prompt banks to develop rigorous internal liquidity crisis management procedures that reduce the probability of central banks or regulators having to intervene in funding markets in the future.
Although new regulations may not prevent another crisis, they do offer solid direction on the design of a new-generation approach to liquidity risk management—and thus offer banks a way to navigate the severe challenges that lie ahead.
While the challenges are severe, Accenture believes there are causes for optimism. The banking community’s understanding of the forces at work is better, and there is a corresponding attitude shift in the industry. In order to manage liquidity risk wisely into the future, Accenture sees five challenges that banks will need to master:
Accenture has decades of experience in helping leading banks achieve high performance. Contact us to find out how we can help you navigate through all the complexity of new regulations to transform your liquidity risk management.
Chris Thompson is executive director-Risk Management, North America lead-Banking and Capital Markets, and is based in New York. Specializing in complex, large-scale finance and risk management programs, he works with some of the world’s leading retail, commercial and investment banks. Thompson brings his nearly 20 years of broad-based experience in financial architectures, risk management, performance management and trading to organizations determined to become high-performance businesses.
Bill Spinard Bill is executive director-Risk Management and key offerings lead-North America, based in Washington, D.C. With more than 25 years of experience in enterprise risk management, corporate governance, and risk quantification, his broad experience and insight help organizations implement enterprise-wide risk management solutions. Through the integration of an organization’s risk management and decision-making processes, Spinard guides Fortune 500 and large-scale not-for-profit companies in implementing sustainable, practical, risk management solutions that drive their efforts to become high-performance organizations.
November 24, 2010
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