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FSA’s failures could lead to a winter of discontent, says think-tank

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The Financial Services Authority’s attempts to set and communicate an actionable implementation plan for liquidity risk have so far failed, according to the results of three surveys by

The Financial Services Authority’s attempts to set and communicate an actionable implementation plan for liquidity risk have so far failed, according to the results of three surveys by independent think-tank JWG-IT.

JWG-IT polled over 30 financial institutions and ten vendors on their implementation readiness in April/May and twice in July. The results showed that banks are not ready for the new liquidity regime.

JWG-IT considers that the FSA’s excessive urgency, coupled with clandestine communications and failure to engage in the debate about how to deliver these controls, could have jeopardised the UK’s regulatory agenda, originally called for by the Turner review.

PJ Di Giammarino, chief executive of JWG-IT, says: ‘We fully appreciate the desire to prevent the next crisis, but we’re concerned about the unintended consequences of this panic to implement changes that are 150 per cent more extensive than MiFID’s but in 40 per cent of the time.’

The Chancellor has clearly stated his intention to be at the forefront of liquidity regulation in an effort to control UK bank’s business models. The Walker review followed with a prescriptive mandate for banks’ chief risk officers to ensure that they have the information flow required to control liquidity positions. JWG-IT says this ‘political positioning’ depends on the FSA’s aggressive timescales which now leave banks less than 75 work days to implement a data-intensive approach to granular quantitative liquidity risk management.

The FSA has stated that they believe the information they are asking for to be part of most firms’ existing liquidity risk management processes despite their own estimates showing that the industry has put the price tag for this regime well in excess of GBP2bn.

Di Giammarino says the announcement of an FSA Liquidity Advisory Group last week was welcome, but that its unannounced posting on an obscure part of the FSA website reflected the FSA’s recent attitude.

‘At this late stage, the FSA’s efforts have fallen far short of previous implementation programmes: no programme office has been established, technical associations have not been consulted and there are no ‘Dear CEO’ letters. Perhaps, most disconcertingly, there are ever-changing data requirements which will not be finalised until September. The FSA has clearly under-resourced this change programme.’

JWG-IT research has found that overall senior management within banks are only just beginning to understand the magnitude of the upgrades required for liquidity risk.

Calls to 750 individuals at 65 firms in April/May 2009 found only 41 per cent had heard of the FSA’s liquidity risk standards consultation paper (CP 08/22) that was released in December 2008.

A further 64 per cent of 20 bank respondents in April/May indicated that their existing systems could not easily be adapted to the new liquidity requirements. This was endorsed by 62 per cent of 19 respondents at Intel’s Faster Risk, Data & Analytics event on 15 July, who indicated that they were not highly confident in their risk architectures’ capability to meet new requirements

The survey also found that 41 per cent of bank respondents in April/May indicated that meeting liquidity data requirements would be their biggest implementation challenge. In addition, 36 per cent of a JWG-IT workshop with 11 firms and vendors on 1 July found data to be the biggest source of implementation risk

Thirty three per cent of respondents on 1 July ranked liquidity risk systems and controls as their top issue – carrying the highest risk and requiring the most resource to resolve – while 28 per cent of 15 July respondents indicated that no resources had been allocated to their top three issues of scenario/stress testing, risk modelling/analytics and data.

Di Giammarino adds: ‘Until the implementation requirements are fully understood, it will be impossible to define the costs accurately. The back-office is already getting pummelled by new change requests. Senior management have not had the chance to solve the unknowns at the same time as coping with mounting workloads with a headcount reduced by 25 per cent.

‘The FSA have not taken the time to engage and help resolve the known unknowns. Rather, global standards are being set behind closed doors with little understanding of the consequences. When we meet with banks, they tell us that confusion is keeping them from building their capabilities.

‘There are clearly fundamental market infrastructure challenges with putting this type of regime in place and we have alerted the FSA, the trade associations and the European Commission to the risks. If the FSA does not rapidly upgrade its approach to working with the firms to establish standards for ‘what good looks like,’ a winter of discontent will descend on UK banks.’

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