Liquidity management in the context of the new regulatory environment

1. Liquidity management in the context of the new regulatory environment AFGAP – Scientific Committee’s annual seminar - April 5, 2012

2. European regulatory landscape before Basel IIIA regulatory liquidity framework partially disconnected from the day to day LRM • Not harmonized regulation across Europe • Application on an individual basis • Regulatory framework does not cover all the components of liquidity risk management => generally limited to liquidity ratios Accordingly, few resources and little weight given to regulatory ratios • Decree of October 12 2006 • Consultation Paper April 21st 2009 Circular CBFA 2009 – 18 (May 8 2009) Liquiditäts-verordnung Bafin Dec. 06 • Law of April 5th 1993 • Circular IML 93 104 • Circular CSSF 07/301 6 July 2007 • Circular CSSF 09/403 Arrêté du 5 mai 2009 • § 25 ABA (Austrian Banking Act) • Liquiditätsverordnung (FMA ,1993) Liquidity Management in the context of a new regulatory environment

3. New regulation emerged to address the liquidity issue International Regulatory Framework As a consequence of a financial turnmoil, a large number of governmental, regulatory and industry organisations are proposing regulations and other means to sthrengthen frameworks for monitoring Liquidity Risk BIS = Basel III Framework FSA Strenghtening Liquidity Standards (I & II) Dec 08-Dec 09 ACP Arrêté du 05 mai 2009 CEBS • Technical advice on Liquidity risk management - 2007 / 2008 • Guidelines on liquidity buffer -2009 • Guideline on Stress Testing – Dec 09 • Draft guidelines on Liquidity cost benefit allocation - 2010 * “International framework for liquidity risk measurement, standards and monitoring“ of the BIS / December 2009 ** “Principles of Sound Liquidity Risk Management and Supervision” of the BIS / September 2008 Liquidity Management in the context of a new regulatory environment

4. Characteristics of current LRM Overview • Taken into account the difficulties experienced during the recent financial crisis and the recommendations from regulators / market expectations, banks have already significantly improved their Liquidity Risk Management framework since several years • LRM is, in general, articulated around the following areas : Short Term Long Term Structural Liquidity buffer • Short Term ratio • Survival time (cash flow) • Liquidity gaps • Intra-day framework • Structural limits • Liability / Asset ratios • Level of highly liquid marketable securities Concentration of funding sources Contingency Funding Plan Stress tests • Counterparties • Market / Instrument type • Tenor concentration • Triggers to initiate CFP • Escalation procedure • Definition of countermeasures • Idiosyncratic • Systemic • Hybrid Liquidity Management in the context of a new regulatory environment

5. Characteristics of current LRM Short term monitoring : cash flow planning • Cash flow Planning • All foreseeable cash flows shall be captured (incl. those from off-balance sheet commitments and liabilities) Cashflow in Deterministic view on future cash flows Cashflow out Stochastic view Mapping Process time Liquidity Management in the context of a new regulatory environment

6. Characteristic of current LRMStress tests • Liquidity Stress Tests - Micro structural Approach • Question: “How much can be liquidated at once and at which discount?” •  Understanding of the order book and its dynamic • 495 shares can be sold at once at an average price of 95,15 • But how is this result dependent on different market conditions? Answer: modeling the order book: Actual Distribution of Orders Volume of Orders Stressed Distributions of Orders Price Volume of Orders average liquidation price: 94,17 93,06 91,29 Price Liquidity Management in the context of a new regulatory environment

7. Basel III international framework : a new deal ? Regulators poised to soften new bank rules The move follows complaints from banks that the new Basel III standards on liquidity – the first international rules of their kind – would force them to sharply curtail lending to consumers and businesses. Financial times Sept 5, 2011 More pressure on the liquidity risk management • From the regulator : Basel III framework • LCR • NSFR • Other metrics to monitor liquidity risk Europe's debt crisis prompts central banks to provide dollar liquidity European and US stocks surge on news that world banks will flood markets – but Lagarde warns of 'dangerous' new phase The Guardian Sept 15, 2011 • From the market : • Consequences of the difficulties experencied by the financial institutions during the recent financial crisis • Expect Basel III requirements to be met today ! Five Steps to Solving Europe’s Debt Crisis NY times August 21, 2011 Liquidity Management in the context of a new regulatory environment

8. Basel III international framework : a new deal ? • Basel III framework will not lead to ‘deep’ changes in the LRM as it, most of the time, already allows to cover the different liquidity risk components • This will allow for a convergence between operational LRM and regulatory framework Short Term Long Term Structural Liquidity buffer • Reduction of the scope of the eligible assets to the liquidity buffer • Short Term ratio LCR • Survival time (cash flow) • Liquidity gaps • Intra-day framework • Structural limits • Liability / Asset ratios • NSFR Concentration of funding sources Contingency Funding Plan Stress tests • Counterparties • Market / Instrument type • Tenor concentration • Triggers to initiate CFP • Escalation procedure • Definition of countermeasures • Complementary scenarios (EBA, FMI) Liquidity Management in the context of a new regulatory environment

9. Impacts on Liquidity Risk ManagementProduce LCR & NSFR ratios • Challenge in terms of IT architecture. • Key points to address are the following • On the top of that, a lot of points to be precised by the EBA with respect to • The format of the reportings • The criteria for liquid assets • % on off B/S items • Frequency • Quarterly publication required by CRD 4 • However, ratio to be monitored on a more frequent basis(at least monthly) • Data • Rely as much as possible on accounting data • Additional data from other sources (FO or ALM systems,…) • Scope • By default, calculated on an individual basis • Weavers for a calculation on a consolidated basis • Consolidated ratio required for financial communication Liquidity Management in the context of a new regulatory environment

10. Impacts on Liquidity Risk ManagementManage the Liquidity buffer • Modify current investment policies in order to focus on eligible liquid assets • Governments bonds • Corporate bonds with high rating • Increase the stock of liquid assets through « auto-securitizations » Bank A SPV Assets AA / AAA Notes Liquidity buffer • A very tightened Collateral management : • Post as much as possible securities not eligible as liquid assets • Control of the costs through active management of assets and liabilities • Example : asset swap inflation linked government bonds strategies Liquidity Management in the context of a new regulatory environment

11. Impacts on Liquidity Risk ManagementInvoice liquidity costs (1/2) • Liquidity spread was–generally- included in the FTP calculation methodology : FTP : Interest Rate Component + liquidity Component Based on money market rates for a given maturity Liquidity spread is the premium for a specific contractual maturity relevant to cost of funding • FTP should now take into account the cost related to Liquidity Buffer • FTP : Interest Rate Component + liquidity Component + Liquidity buffer costs Funding Swap % Govies time Liquidity Management in the context of a new regulatory environment

12. Impacts on Liquidity Risk ManagementInvoice liquidity costs (2/2) • How to calculate costs related to liquidity buffer ? • Other points to consider : should or can liquidity premium be fixed at origin ? Yield of the assets Cost of carry Low credit risk Central bank eligible … • Shortest maturity = 30 day • More longer maturities can be chosen to ensure the buffer can withstand significant periods of market stress Liquidity Management in the context of a new regulatory environment

13. Impacts on Liquidity Risk ManagementCartography of the Off Balance Sheet Commitments • Off Balance sheet commitments will be weighted more : • Retail : 5% • Sovereign / non financial : 10% • Operational impacts : • Be able to screen off balance sheet commitments more precisely than today (by type of counterparts). • Invoice the liquidity costs to the business lines holding the OBS positions Liquidity Management in the context of a new regulatory environment

14. Impacts on Liquidity Risk ManagementStill time to change Basel III rules ! • Many open points for which regulatory rules may evolve : • Criteria for the definition of liquid assets (level 1 or 2) • Run off factors on Corporate deposits (75%) • … • Other points to discuss with local regulators / authorities : • ECB repos : decrease of the haircuts on collaterals Liquidity Management in the context of a new regulatory environment

15. Next step : to an integrated monitoring framework for P&L, capital and liquidity To an integrated monitoring framework Liquidity and capital are included • Monitoring framework including 3 pillars : P&L, Capital and Liquidity • Challenges in terms of IT Architecture : volume of operations, data model, calculations capacities • Insertion in the Group’s strategy through common metrics • A monitoring of business lines to be adapted : change management, renewal of performance indicators • Basel II has led to the set up of ICAAP & capital planning processes • More and more constraints in terms of solvability and complex analysis rules implying a more refined and more frequent monitoring framework for capital Capital • Metrics by business line : LCR ? Liquidity B/S ? • Regulatory and operational perimeters differ • Operational insertion to be done by invoicing liquidity costs to the business lines • Challenges in terms of process and IT architecture : internal contracts, day to day monitoring, collateral management Monitoring by P&L Liquidity • P&L oriented • Monitoring based on budget forecasts • Limited actions (cost cutting) • Pressure on costs reductions in order to maintain ROE levels Costs • A new framework for monitoring the performance of business lines to be implemented Business lines monitoring Liquidity Management in the context of a new regulatory environment