Introduction

• A bank will produce a number of liquidity reports in the normal course of business, on a daily, weekly, monthly and quarterly basis. It is important that the format of liquidity is both transparent and accessible. The following list of reports represent benchmark reporting in UK –
  • Deposit tracker report
  • Daily liquidity report
  • Funding maturity gap (mismatch) report
  • Funding concentration report
  • Undrawn commitment report
  • Liability profile
  • Wholesale pricing and volume

Deposit Tracker Report

• The deposit tracker is a simple report of the current size of deposits, together with a forecast of what the level of deposits are expected to be going forward. This report is tracked weekly and monthly because it provides an idea of the LTD ratio in the immediate short term. The LTD is a key management liquidity ratio. The table in the next page shows the first part of a typical deposit tracker report for a medium-sized commercial bank, as at month-end May 2009. The report provides the following :
  • the month-end actuals for deposits by customer type
  • the change from each month-end
  • the aggregate customer assets and hence, the LTD ratio
  • a forecast of the position for the month-end for each month to the end of the year.

This bank is required to meet a Board-approved LTD ratio limit of 85%, which it is just exceeding as at the date of this report, but the forecast for year-end is within this.

• This is the second part of the deposit tracker, it shows how much liabilities will need to increase, or assets reduce, all else being equal, for the bank to meet a particular LTD ratio.

• This figure is a graphical presentation of the deposit tracker report.

• This figure from the report shows the customer deposits by account type and tenor. A large percentage of the retail bank deposits are current accounts and rolling deposits, with very little fixed-term deposits. For regulatory purposes, these funds will be treated as short-term liabilities and will not assist the bank’s regulatory liquidity metrics (which emphasizes long-term funds), even though the local regulator may allow the bank to treat overnight balances as longer term if they can be shown to be acting as such in “behavioral” terms. In this case, it is worthwhile for the bank to undertake a marketing exercise to determine if customers may be interested in moving their deposits into fixed-term or notice accounts. Any increase in the size of the latter will improve the firm’s liquidity metrics. This illustration assists the Treasury department to gauge the trend of the deposit balances over time

Daily Liquidity Report

• The daily liquidity report is a straightforward spreadsheet detailing the bank’s liquid and marketable assets, together with liabilities, up to 1-year maturity and beyond. It provides an end-of-day of the bank’s liquidity position for the Treasury and Finance departments. Each branch and subsidiary will complete one, although a bank that has only a branch structure (and no subsidiaries) may aggregate the report. This figure provides an example of a daily liquidity report for a commercial bank. This uses inputs from the bank’s balance sheet accounting system to provide a summary of liquid assets, liabilities by tenor, and a cumulative liquidity report. It is the summary of liquid securities; The value of securities deemed instantly liquid will be input to the liquidity ratio calculation report.

• This table is the summary of assets.

• This table is the summary of liabilities.

• This table is the cumulative liquidity report and liquidity risk factor calculation. The “counterbalancing capacity” in this table is the sum of available securities to cover for sudden cash outflows.

Funding Maturity Gap (Mismatch) Report

• The funding gap report shows the maturity gap (also known as the maturity mismatch) per time bucket, for all assets and liabilities, with an adjustment for liquid securities. It includes the cumulative liquidity cash flow of the previous report just described, and indeed the two reports can be combined. An extract is shown in this table.

FUNDINGMATURITYGAP(MISMATCH)REPORT www.midhafin.com

• This Figure shows the maturity mismatch in graphical form. The key indicates the cash flow for each type of product.

• The same report is used to generate the cash flow survival horizon report which is shown in this figure. The bank in this example has a survival horizon of only seven days under normal circumstances. When the cash flow value of liquid securities and other adjustments is included, the survival period is extended to 27 days.

This is still below the Basel III requirement, and so on the strength of this report the bank will need to take action to address the liquidity

Funding Concentration Report

• Funding source concentration reports are key information for senior Treasury and relationship managers to assess funding diversity, and ensure that a bank should not become over-reliant on a single source, or sector, of funds. This includes reliance on intragroup funds. The table in this page and the next page is a small part of a Large Depositor Concentration Report for a banking group. In this case “large” is defined as someone that deposits USD 50 million or more; however, a bank may define it in percentage of total liability terms rather than absolute amounts. Generally speaking, a deposit of 5% of total liabilities should be treated as large by ALCO.

• In the illustration shown, the largest depositor (CBS) exceeds the internal single-source concentration limit of 10 % by a considerable margin. Assuming that this is a close customer relationship, the bank will need to increase its liabilities base to bring the share down to limit, or otherwise risk damaging the relationship by asking the depositor to remove some of the funds.

Undrawn Commitment Report

• Off-balance sheet products such as liquidity lines, revolving credit facilities, letters of credit and guarantees are potential stress points for a bank’s funding requirement. In a stress situation a bank can expect unutilized liquidity and funding lines to be drawn down, as customers experience funding difficulties of their own. The existence of undrawn commitments can exacerbate funding shortages at exactly the wrong time, which is why liquidity metrics include such undrawn commitments. It is also a reason to report them separately. This figure is an example of an undrawn commitments report, showing trend over time.

• This figure shows the trend for both drawn and undrawn committed facilities. These are aggregate-level reports, the bank will also produce detailed breakdowns per customer.

Liability Profile

• Liability Profile is a simple breakdown of the share of each type of liability at the bank. An example is shown in this figure. In this case, the total liabilities of the bank are made up of the following categories:
  • Customers: individuals;
  • Customers: large enterprises;
  • Repo (highly liquid securities);
  • Repo (high-quality securities);
  • Asset-backed securities;
  • Unsecured: other wholesale;
  • Repo (other assets);
  • Conditional liabilities.

Other types of funding sources by product type may include one or more of the following:

• Covered Bonds;
• Client free cash;
• Structured deposit products;
• Unsecured: credit institution;
• Unsecured: governments and central banks;
• Unsecured: non-bank financial;
• Customers: SME;
• Group;
• Net derivatives margin;
• Capital: undated and dated;
• Primary issuance.

• The report format can be set to the user’s desired choice.

Wholesale Pricing and Volume

• A bank’s liquidity position is not illustrated solely by its cash low liquidity metrics. An indication of liquidity strength can also be gleaned from looking at a bank’s funding costs, and the composition of its funding by product. The regulatory authority can obtain an early warning of a particular bank experiencing funding stress if it observes that its funding yield curve is rising materially above that of its peer group.

For individual bank senior management, it is difficult to obtain this information about other banks; however, it should be possible to get an idea of the peer group average from the regulator. A comparison to one’s own funding level is a worthwhile exercise and should be undertaken on at least a quarterly basis. This figure is an example of a firm-specific yield curve for a UK bank.

• This figure shows the breakdown of the same bank’s wholesale funding by volume and product type.

Summary And Qualitative Reports

• Liquidity report MI for senior management should be presented as a 1-page summary of the key liquidity metrics. This can be distributed on a monthly basis or as directed by ALCO, although the distribution frequency may be increased during a stress period. Keeping the report to one side of A4 will increase the chance that the report will actually be read and noted at senior management level, which is why these reports are an important part of liquidity MI. An example of a monthly summary report is presented in this figure (continued in next page as well).

. . . . . figure continued

• An example for a bank with a group structure is shown in this figure. For banking groups that operate across country jurisdictions and multiple subsidiaries, a qualitative report should be completed for Head Office Group Treasury, on a monthly basis. This will assist the group to better understand the liquidity position in each country.

Frequency of Reporting

• In general, the main liquidity reports are required by the regulator, who stipulates their frequency. ALCO should view this obligation as a minimum requirement, and supplement it with additional MI as desired. In the UK, quantitative liquidity reporting is an integral part of the regulatory regime. The full requirement applies to individual liquidity adequacy standards (ILAS) firms. Some smaller institutions and foreign branches are not ILAS firms, and where reporting requirements are waived or modified, the regulatory authority will agree the format and frequency of illiquidity reporting on a case-by-case basis.

Stress Test Reports

• The purpose of liquidity stress testing is to ascertain the extent of funding difficulties for the bank in the event of idiosyncratic or market-wide stress. Stress test output results should help senior management to understand the liquidity position of the bank, enabling them to take mitigating action if deemed necessary.

• The primary stress test output is the cash flow survival report, which was discussed earlier. This figure (continued in the next page also) illustrates an example of a report under BAU conditions and one after the mitigating actions have been taken (such as liquidating securities, and accessing contingency funding sources).

This second chart shows the stressed cumulative cash flow forecast taking into account the immediate sale or repo of marketable securities. In this example, the standard FSA-specified stresses have been applied: wholesale funding, retail liquidity, intra-day liquidity (3- and 5-day stresses), cross-currency liquidity, intra-group liquidity, off-balance sheet liquidity, marketable assets, non-marketable assets, and funding concentration.

In this example, the survival period has been extended from 49 days to 93 days after taking into account the impact of the stress.

• A line-by-line stress test result report should be produced on a quarterly basis, or as required by the regulator. The example in this table (continued in the next two pages also) shows the results of individual shocks on the liquidity ratio, and the probability of each result occurring. The following categories are included:

• reduction in liquid assets;
• decrease in liabilities;
• FX mismatch;
• combined shocks.

. . . continued

. . . continued

This report would be produced as part of routine stress testing, undertaken either by Treasury or Risk Management.

Treatment of Cash Flows

• A common question in liquidity reporting concerns the treatment of specific types of cash flow.

For example, consider the following:

• Treatment of non-maturity items in liquidity/interest rate sensitivity analysis; for instance, demand deposits.
• Treatment of off-balance sheet items in liquidity gap analysis:
  • derivatives (options: equity, floors, caps and collars);
  • undrawn commitments.

In fact the treatment often differs for regulatory return purposes and what is in place in many banks’ actual liquidity reporting models. Callable and demand deposits are treated as 1-day money for regulatory purposes, although certain regulatory authorities will allow a “behavioral” adjustment of retail deposits where it can be shown that these remain fairly stable over time. For example, 50% of such deposits may be allowed to be treated as longer term funds. Generally, however, such funds do not improve a bank’s liquidity metrics, because they are viewed as 1 -day funds by regulators.

• For off-balance sheet items, the UK FSA treatment is as follows:
  • Derivatives values/notionals are not included in the liquidity ratio calculation; however, coupons receivable or payable will be included on their pay dates.
  • Commitments: 10% (specified by FSA) committed but undrawn lending is included as an outflow of cash (at sight) and included in the ratio calculations.

• Bank liquidity models commonly apply the following treatment:
  • Derivatives are included to the extent that collateral is payable or receivable under an ISDA/CSA agreement; coupons receivable or payable will also be included on their pay dates.
  • Commitments: all committed but undrawn lending is included as an outflow of cash (at sight) and included in liquidity calculations.

• In general, a conservative approach to treatment of expected cash outflows, whether as derivative collateral or undrawn commitments, is recommended business best practice.