McDowall: A more forensic approach to risk is needed.
Regulators across the world may soon be pooling information in an attempt to police global banks’ liquidity risk. Managing liquidity risk, which was not high up on the regulatory or banking agenda before the crisis, is likely to come to the fore in the wake of the global credit crunch, says Bob McDowall, research director, Europe, for analyst firm TowerGroup. “Regulators will want to see a demonstration of liquidity resources banks can call upon in times of stress,” he explains.
McDowall believes national regulators will need to build systems in order to exchange information so that they can exercise regulatory oversight of banks’ liquidity risk management. “Regulators will need to take a more forensic approach to information they send and receive,” he adds.
Banks will also need to make fundamental changes to the way they manage risk. “You cannot look at risk in isolation or by asset class or geography. “ McDowall continues. Although most global banks today do not have the ability to measure and manage liquidity risk on an enterprise-wide basis, McDowall says they need to be able to take a view at any time as to what their risk and liabilities are. “It needs to be up to the minute, and not end of day or periodically during the day,” he says. In essence, banks will need to move to a real-time, more predictive approach to risk management, which requires much more capturing of information and analysis of prices and behavior patterns.
However, according to Tony White, managing director, product and R&D;, at financial software vendor Wall Street Systems, gaining that real-time view of liquidity will be challenging, as most banks’ risk management systems are generally kept in a separate “silo” and do not provide a clear overview of information pertaining to credit and other interdependencies. One recent example of the failure of risk management systems arose during the collapse of Lehman Brothers, when many banks did not have the ability to stop payments from going to the ailing investment bank. “The technology [within banks] is all over the place,” says White. “Going forward, it will have to be consolidated.”