Liquidity risk management for banks – and how Africa

is different
ASSA Banking and Finance seminar
24 July 2015

Phillip Olivier
Head: Asset and Liability Management, Barclays Africa Treasury
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
What is liquidity risk?

“In banking, liquidity risk is

defined as the risk of
being unable to meet all
the bank’s financial
obligations when they
become due.”
Liquidity risk in banks arises primarily from their role in the
economy of maturity transformation.

Annuity portfolio Bank

60 70
Reinvestment Refinancing
50 60
requirement requirement
50
40
40
30
30
20
20
10 10
0 0
0 5 10 15 20 25 30 35 1 2 3 4 5 6 7 8
Year Year

Assets Liabilities Assets Liabilities

Under stress, a bank’s liabilities become even shorter,
further increasing its refinancing requirements.

Bank – Business as Usual Bank – Stress

70 70 Much greater
60 Refinancing 60 refinancing
50 requirement 50 requirement
40 40
30 30
20 20
10 10
0 0
1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7
Year Year

Assets Liabilities Assets Liabilities

Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
What makes liquidity risk special?
• Comes unexpectedly.

• Capital is an inefficient risk

mitigant.

• Requires preventative
measures and a good
response.

• Need to focus on both sides

of the balance sheet to
manage effectively.
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Preventative measures are far reaching ranging from
balance sheet structure to response planning.

• Balance sheet structure

(assets and liabilities).

• Liquidity stress testing

(internal and regulatory).

• Metrics and dashboards.

• Contingency funding
plan / communications
strategy.
 Various factors need to be considered when determining the optimal
balance sheet structure from a liquidity perspective.

Assets Liabilities
• Size and • Tenor of funding
composition of Other assets Other liabilities base
liquidity buffer
Capital markets • Composition of
• “Liquidity value” Liquidity buffer
funding funding base
of shorter dated (Retail, SME etc.)
Institutional /
customer assets money markets
funding • Level of
Short-dated
• Level of customer loans
concentration of
encumbrance of Corporate / funding base
public sector
balance sheet deposits
• Currency
• Ability to Retail / SME
deposits
composition
Long-dated
securitise assets customer loans
• Secured /
Equity
unsecured
The Basel liquidity rules have led to a fundamental
change in the way liquidity risk is assessed.

Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR)

Total qualifying Available Stable

liquid assets Funding
> 100% > 100%
Required Stable
Net cash outflow
Funding

Time horizon: 30 days Time horizon: 12 months

Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Preventative measures could prove meaningless
if a bank responds badly during a liquidity crisis.
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Liquidity stress events can happen for a vast
range of reasons.
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Challenges in South Africa are very different
from those generally experienced across the
continent.
South Africa – typical Broader Africa – typical
balance sheet balance sheet

“Risky”
institutional
funds
Customer Customer
loans deposits
Customer Customer
deposits loans

• Victims of own success? • Concentrated liability bases.

• Limited availability of liquid assets. • Unexpected central bank actions.
• Tenor limitations – NSFR a • Limited liquidity in gov’t bond market.
challenge. • Dynamic balance sheets.
Contents
1 What is liquidity risk?

2 What makes liquidity risk special?

3 Managing liquidity risk in banks – preventative measures

4 Managing liquidity risk in banks – response during a crisis

5 Global case studies

6 Why is Africa different

7 Some takeaways
Some takeaways.
• Liquidity risk has unique
features.

• Liquidity risk
management for African
banks pose unique
challenges.

• A “one size fits all”

approach does not
always work.
Disclaimer
This document contains general information based on my own views only and
does not necessarily represent the views of my employer.
It is not intended to provide specific professional advice or services.
This document is not a substitute for professional advice or services, and it
should not be relied upon or used as a basis for any decision or action that
may affect you or your business.
Whilst every effort has been made to ensure the accuracy of the information
contained in this document, this cannot be guaranteed and I shall not have
any liability to any person or entity who relies on the information contained in
this publication.
Any such reliance is solely at the user's risk.