10th Apr 2018

Liquidity Stress Testing | Regulatory Challenges for Treasury & Finance

In the same way that new cars are subject to tests to analyse their durability, balance sheets must now undergo an equivalent process. This could become extremely labour-intensive. James & David discuss how technology could make LST as easy as clicking a button – supporting treasury and finance teams around the world.

Liquidity Stress Testing, it a term we typically associate with banks. But it’s something corporates are looking at more and more. How can treasury professionals identify, analyse, manage their risk to ensure liquidity contingency planning?

Liquidity stress testing is another example of banking regulation which can be applied as a best practice to any corporate treasurers’ risk and control framework. Basically, the concept of LST says that you apply stress scenarios to your balance sheet and look at what the result would be. That could be simple measures such as an increase in the unemployment rate or changes in interest rates all the way through to simulating historical events, to see what impact that would have on your current balance sheet. Just good practice that organisations where it’s not regulatory mandates corporates should be looking at this for best practice for their risk and control framework.

The concept of LST should be something that corporates should be able to just click a button on piece of software and simulate some of these tests on a day to day basis because a balance sheet fluctuates on a day to day basis so we should move away from it being a weekly or monthly exercise to a more continuous one.
We’re providing the types of solutions and types of data sets in our software that will allow a corporate treasurer to do that and have much greater visibility not just of balance sheet in its current liquidity positions but also what those positions would look like in certain events.

Another thing we need to be aware of as we cover all these different types of regulations and risk management practices is not only is there a lot of them but there is a lot of scope for national interpretations of how it gets implemented and potentially that can lead to more complexity in the regulatory landscape because what you end up with is regulatory arbitrage where organisations are basically playing off national or geographic interpretations of the regulation against each other so just further complicating some of the way that the way these regulations are interpreted and corporate treasures have to then manage from balance sheet perspective in terms of what’s going to derive the best value for the organisation.

The CRD IV is an interpretation of an element of Basel III so you have this split of regulations being interpreted by different regulators so you might have different reporting requirements within different regions, so what that means from the treasurers’ standpoint is they have multiple reporting to be done across multiple areas. Issue of trends is going to be very important. The seasonality of treasurer operations means that most large treasuries have an in house bank. These in-house banks act as banks within the organisations. From their perspective, applying these types of stress test scenarios to seasonality (e.g. Christmas shopping, Black Friday) they can calculate how to best utilise the liquidity that comes out of those events through historical trend analysis. This is where these Fintech tools really come into their own. Products like Cash Management really allow a trend analysis to be done without going into spreadsheets because you can click a tab, put your dates in and then it shows you the historic trend within a certain period.

Particularly in a depressed rate environment such as today, we’ve taken the view at AccessPay that real-time information is only the start of it. What you need to get to is forecasting and automated generation of predictive data because only then can you start to make best use of your liquidity because there will be scenarios where liquidity dries up late in the day so if you’re spending all your time gathering info then you have little time to invest that you’re going to be faced with more punitive rates so we’re using technology at AccessPay to give customers, corporate treasurers the opportunity to invest based on forecasted info, based on predictive analytics that we generate before the event has happened.