Asha Gowda, Director – Market Risk Governance, KeyBank

Below is an insight into what can be expected from Asha’s session at Risk Americas 2024.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

1. What impact does heighten scrutiny on intraday deposit monitoring have on financial institutions?

Intraday deposit monitoring can be very challenging for many institutions and was at the forefront of the 2023 banking turmoil. Financial institutions need to understand what the regulatory expectations are for intraday deposit monitoring coupled with understanding daily usage under business-as-usual conditions as well as under stressful conditions. Deposit and loan activity can abruptly change throughout the day even with the appropriate forecasting. Financial institutions need to evaluate their risks and controls to ensure they have a good sense of client behaviour for both inflows and outflows. It can be challenging when the right controls are not in place. Automation is critical. Some institutions have the ability to monitor intraday activities through automation while others, however, have manual processes in place and utilize a number of individuals to do that monitoring, which can lead to errors. In addition, policies, procedures, and documentation for reviewing historical trends related to intraday deposit monitoring helps financial institutions ensure their methodology is substantiated related to minimum cash balances and their forecasting approach. Lastly, regulatory reporting has been heightened with larger globally systemic institutions reporting the Liquidity Coverage Ratio (LCR) and the 2052a on a daily basis. Smaller institutions, while they calculate LCR internally or report 2052a monthly, need to ready for accelerated reporting requirements as regulatory expectations evolve.

2. How can financial institutions ensure ability to gather real-time data and insights?

Ensuring the complete ability to gather real-time data is a daunting task as some institutions may have disparate systems that do not interact with each other. Large, medium, and small financial institutions all have their unique ways of trying to accomplish this. Communication is important. Corporate Treasury, which manages and monitors the balance sheet, is the most critical area in terms of understanding real-time data and impacts to intra-day liquidity. Corporate Treasury does need insight from various internal stakeholders within the institution as well as Federal Reserve account monitoring. Internal stakeholders include other areas within the Finance line of business, Operating Units, Commercial Payments, and Relationship Managers within a financial institution’s footprint. Without this partnership, gathering real-time data is an obstacle and has regulatory reporting impacts. Real time data can be overwhelming, but a good understanding of end-to-end processing and automation is the key element in obtaining the right level of data to make appropriate decisions.

3. Why is it important for financial institutions to ensure multiple forms of liquidity availability?

It is extremely important, and a regulatory expectation, for financial institutions to have multiple forms of liquidity available and to be operationally ready. Having multiple forms of liquidity available, such as from the Federal Home Loan Bank (FHLB), advances both as a member and non-member bank, federal fund lines, repurchase agreements (repo) transactions, brokered deposits, or the Federal Reserve’s Discount Window, comes at a cost and can be quite expensive. The best form of liquidity is attracting deposits organically and ensuring they are sticky. These deposits are inexpensive. While they are the best form, the competition for attracting these types of deposits is tense. Understanding client relationships is important for the retention of deposits. To ensure financial institutions are operationally ready to access funds other than traditional deposits, banks need to have appropriate communication, channels, and collateral – if appropriate – withh these sources. This come will adequate controls related to procedures, documentation, and approvals.

4. How can financial institutions ensure they manage daily mismatches between assets & liabilities?

The mismatch of assets and liabilities occurs with the tenure of loans with the tenure of funds not matching adequately. Various reasons for this occurring relate to changes in interest rates, maturities, and cash flows, to name a few. Mismatches occurred with a number of the failed banks during the 2023 Financial Crisis. Financial models are needed to appropriately monitor these mismatches with the right individuals monitoring it. Financial models are only good with quality of data as an input and the conceptual soundness of the models utilized. Data quality is a foundational need for these models, but a challenge for many financial institutions. Strong partnership, transparent decisioning, review and challenge and governance with lines of businesses, executives and Corporate Treasury is critical to ensure financial institutions manage daily mismatches between assets and liabilities and understanding the balance sheet from a holistic perspective.

5. How can heightened liquidity risks be managed effectively in a period of high interest rates?

Elevated interest rates have an impact on the cost of funding and deposits as well as the value of investments on certain securities. In addition, there is an impact on credit and the potential for the need to fund more. With that, there are various avenues to evaluate heightened liquidity risk during this period of high interest rates. Evaluating marks on liquid assets, monitoring stored liquidity, establishing hedging strategies, and AOCI impacts is critical. The cost of liquidity is high and attracting deposits is very competitive. With higher interest rates, loan production may slow as well, depending how a financial institution’s balance sheet is positioned. In a time of stress, as was apparent during the 2023 banking turmoil, risks and controls need to be evaluated to ensure liquidity from a short-term and long-term perspective are being managed appropriately. The types of controls that can be implemented are policies, procedures, stronger oversight including a re-evaluation of committees or establishment of new committees, better understanding of existing and new products impacting the balance sheet, evaluation of accounting policies and practices, validation, and re-validation of financial models, and re-evaluating processes and identifying gaps impacting a financial institution’s positioning.