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![Text Box: New Legislation
AFTER FINREP & COREP NOW LIQUIDITY REPORTING
In 2007 and 2008 Banks invested a massive amount of time and money adapting their software and interfaces to implement the FINREP and COREP reports. After that, one might think legislators could have spared banks the trouble and cost of another legislation with big impact on IT developments. Unfortunately, after the summer of 2008, during the ensuing market turbulence and financial crisis, existing legislation as well as the newly implemented FINREP and COREP reporting proved hardly adequate to provide views of banks’ risk profiles.
As FINREP and COREP reporting give a very static, at-a-certain-point-of-time view, they can not anticipate possible future problems or extreme conditions, like there occurred with the recent financial and liquidity crisis. The reports were even blamed for worsening the crisis:
FINREP for introducing a reporting of the balance sheet at market value, which -when market falls- leads to a huge depreciation of assets, unrealized losses and additional capital being required by banks.
COREP for calculating capital adequacy, linked to the rating of companies that were being degraded too (?) quickly in view of the state of the economy by rating companies like S&P.
Instead of bringing transparency, the reports were leading to more instability, having failed to answer the new liquidity risks banks were facing.
Even in countries -like the UK- where there was already some kind of liquidity reporting, it proved insufficient. The FSA in the UK admitted: “One key question to be addressed with regard to liquidity reporting for the various data items is reporting frequency. Recent events have shown that liquidity problems crystallise rapidly and that, therefore, a high reporting frequency is important [for the FSA] to form a complete picture of firms’ liquidity positions at all times. The Bank of England has expressed a strong interest in frequent and highly granular reporting on liquidity.” The UK FSA Consultation Papers lead the way in Europe – being the most significant liquidity reporting regime introduced anywhere. In addition to regulatory reporting, these consultation papers also introduce stringent demands on liquidity risks, stress and scenario testing. Firms must be able to stress test a number of risks, and have contingency funding plans in place.
Risk areas include:
pricing liquidity risk
intra-day liquidity risk management
collateral position management
liquidity across legal entities, business lines and currencies
diversification of funding
adequate market access must be understood.
It is not just a UK FSA initiative, liquidity stress testing is a significant area of supervisory regulatory interest internationally. In Luxembourg and Belgium, the regulatory bodies have moved in the same direction as well and are preparing new laws, expected to be put in place end 2009. Also, the CSSF Circular 09/403 in May 2009 includes new provisions for the ICAAP (Internal Capital Adequacy Assessment Process) document regarding liquidity risks.
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