Panel: Liquidity Risk Monitoring Standards 'Lack Strong Base'

London - The new Basel Committee on Banking Supervision (BCBS) liquidity risk monitoring standards lack a strong foundation due to poor data in the industry, according to more than 90% of attendees at a FS Club meeting in London in March.

In December 2009, the BCBS issued the consultative document, 'International Framework for Liquidity Risk Measurement, Standards and Monitoring', with a closing date for comments of April 16.

Section 100 of the consultation paper stated: "The banks will provide the raw data to the supervisors, with no assumptions included in the data. Standardized contractual data submission by banks enables supervisors to build a market-wide view and identify market outliers vis-a-vis liquidity."

London-based PJ Di Giammarino, chief executive at regulatory think-tank JWG, said regulators want to measure the amount of micro-prudential and macro-prudential risk in the system, and to do this they will look at an individual firm's data. But the data must be comparable across firms. "The banks are being asked to provide the raw risk data to the supervisors without assumptions. Supervisors will then apply their own formulas," he said.

Yet, at the meeting, one speaker said firms will not be able to send the raw data to the regulators as there is a degree of intervention.

Julia Sutton, global head of customer data at RBS Capital Markets, said banks have to be able to manipulate the data, and firms typically operate in silos with different data sets. "I am not sure I'm comfortable that most banks have enough accurate data to allow them to comply with what we are seeing come through from these discussion papers," she said.

Christopher Clack, director, Knowledge Transfer Network, financial services and director, financial computing, at the University College London, said: "The approach the regulators are taking is mostly bottom-up, and it is still focused on regulating individual organizations."

"One thing you learn with complex systems is that trying to understand system behavior bottom-up, focusing just on the individual entities, does not work. With just three elements interacting in the system, it is possible to get unpredictable system behavior even if you know their rules of engagement," he said.

Meanwhile, Sutton said collaborating with regulators remains essential. "I don't think anyone disagrees with what the regulators want to achieve or thinks we should not be focusing on this," said Sutton, suggesting regulators need market participation.

New Paper Focuses on Data

Still, the focus on the importance of data as a foundation is increasing. On March 23, the day after the FS Club meeting took place, the BCBS released the consultative document 'Principles for enhancing corporate governance' for comment by June 15, emphasizing the attention firms should give to their data.

"As banks make use of certain internal and external data to identify and assess risk, make strategic or operational decisions, and determine capital adequacy, the board should give special attention to the quality, completeness and accuracy of the data it relies on to make risk decisions," the consultative document states.