Liquidity risk reporting in a Post-Dodd Frank environment

Exploring key opportunities for improving liquidity risk management

Although there has been momentum toward regulatory reform, institutions should continue to improve their liquidity risk reporting and monitoring capabilities.

October 4, 2018 | Financial services

Liquidity risk reporting: Executive summary

Although there has been momentum toward regulatory reform, institutions should continue to improve their liquidity risk monitoring and reporting capabilities. Moreover, institutions should be maturing their processes to evaluate their liquidity risk management and reporting frameworks; to improve on data sourcing and controls; and, most significantly, to consider how data gathered for compliance reasons can be leveraged to benefit the institution.

We continue to see the industry struggling to fully advance on improvements in liquidity risk management:

  • Current liquidity risk operating models have room for improvement since most are reactive, project-based responses to regulatory rather than business drivers;
  • Incentives exist to optimize liquidity buffers across legal entities via enhancements to data quality, process models, and technology architectures;
  • Data collected and consolidated across lines of business and products can be mined for insights on customer and market behaviors impacting liquidity; and
  • Tangible evidence exists for the Federal Reserve to refine and revise the Complex Institution Liquidity Monitoring Report (2052a) now that it has analyzed and reviewed the data from all categories of covered institutions and with the expected release of the Net Stable Funding Ratio (NSFR) final rules to align with the Liquidity Coverage Ratio (LCR) calculations

A foundational starting point for addressing these improvements is the 2052a process. The 2052a captures all of an institution’s assets, liabilities, inflows, and outflows. It requires granular data on all products, which—in turn—requires sourcing detailed data. Additionally, it is a daily or monthly snapshot of a firm’s liquidity risk position that the Federal Reserve regularly reviews and analyzes to gain insight into each firm’s asset/liability mix.

Liquidity reporting journey pre- and post-crisis

Implementation of the FR 2052a

The majority of covered institutions met their initial 2052a reporting obligations using tactical solutions that met submission requirements and deadlines, but many were sub-optimal in meeting shortened reporting windows (e.g., T+2). Included in the tactical solutions were initial ledger-based approaches that were unable to provide cash flow data, leading to workarounds to generate the contractual flows for the life of the assets and liabilities.

Institutions relying on tactical solutions and manual workarounds should consider the sustainability of their current 2052a processes. Tactical solutions are typically found in collateral identification and valuation; in categorizing assets; and in sourcing flow data from retail business lines and products. Workarounds can create the risk of poor data quality and require stringent internal controls.

The 2052a is part a progression of supervisory liquidity reporting that has evolved since 2008. The 2052a report is still relatively new in that it typically takes a few years before a data collection matures. Several versions of the current template were made with each new version improving the utility of data and closing data gaps. Other efforts to collect liquidity data including the Financial Stability Board (FSB) sponsored collection requiring granular information of global systemically important banks’ (G-SIBs) bilateral liabilities to assess the concentration of their largest funding providers (banks and non-banks) and their major funding dependencies (e.g., use of wholesale funding). These data are used with traditional regulatory reports, like the FR Y 9-C.

In addition to the external regulatory reports, expectations of prudent and effective internal liquidity management have been conveyed by the regulators and adopted by the industry. The below figure outlines the tests and metrics typically used internal liquidity risk management.

Key takeaway: Although some form of liquidity reporting has been both an external and internal requirement for decades, liquidity reporting, in particular, FR 2052a, has continuously evolved to include a broader scope of institutions, standardized reporting, more granularity; and a larger set of data sets. The post-Dodd-Frank era for liquidity requirements issued by the Federal Reserve does not mean the industry should stop with continuous improvements in liquidity monitoring and reporting. These improvements are needed to keep up with industry practice and to improve overall liquidity management practices.

FR 2052a liquidity reporting framework and context within a Treasury organization and the firm overall

Revisiting liquidity risk operating models

Existing liquidity risk operating models typically arose in response to events and regulatory requirements, often resulting in a fragmented model with separations between treasury management, lines of business, and the regulatory reporting function. Although the existing operating models have sufficed, the industry has realized that the existing models are tactical however there are added benefits and opportunities in a more strategic approach.

There are five key principles—centered on themes of data quality, firm-wide integration, data centralization, and culture—that institutions can consider for their respective liquidity reporting models. These principles and themes each complete the framework around liquidity reporting operating model and governance, process, data and reporting, and system architecture.

Principles Examples of outcomes of operationalizing principles
1 Firm-wide, centralized framework where Business, Finance, Risk, and other relevant functions are equal partners Liquidity reporting framework integrated with firm-wide data governance practices
2 View of data as an enterprise asset rather than a technology concern Central Inventory of data across business lines

Ongoing senior management support
3 Recognition that data depth and quality are essential to managing financial and operational risk Enforcing a data quality culture through each line of defense, including the third line (e.g., internal audit)
4 Instill accountability for data through training and incentives Effective accountability for data owners

Effective training of business lines on data impacts and technical requirements of liquidity reporting needs
5 Incorporate the data model in the new product approval/acceptance process Understanding and acceptance firm-wide, across all levels, that data quality life cycle begins as soon as data enters the firm

The central theme across the principles is that a sound liquidity risk management and reporting framework requires a firm-wide approach spanning across stakeholder groups; a revised paradigm on the value of data; instilling accountability, and sustainment by embedding data requirements in new products.1

1 For further insight on these principles, BCBS 239 “Principles for Effective Risk Data Aggregation and Risk Reporting” provides a tactical framework for controlling and managing data and information quality.

From a firm-wide perspective, FR 2052a liquidity reporting governance should align to existing accountability policies and regulatory reporting structures. As the Treasury organization itself should also fit into the broader firm-wide framework, it should—in turn—leverage the same policies and framework components for its internal liquidity reporting.

  • If there is a difference in reporting between FR 2052a liquidity reporting and internal liquidity reporting, does it make sense to accept and explain a large difference?
  • Is the information in reporting consistent in terms of entities, countries, and currencies, and can any differences be easily explained?
  • Are differences in assumptions consistent across products and maturities for my FR 2052a reporting and internal stress testing? If there are differences, can they be easily explained?
  • Is my data sourcing consistent across internal and external reporting and metrics?
  • Does all of my liquidity reporting, including metrics and associated documentation and processes, reflect the true liquidity risk management of my institution, and not simply a “check the box exercise” to meet regulatory requirements?

Key takeaway: Ineffectively managing liquidity risk and reporting, a firm should align and reconcile metrics and reporting. Doing so can not only determine compliance with regulatory requirements and expectations but also can help promote a better understanding of risk across the organization.

Range of approaches to liquidity risk monitoring & reporting

Although many firms have considered the liquidity reporting framework in the context of the Treasury organization and the firm overall, we have seen various approaches as firms moved from the project-based approach used in building the reporting capability to the business-as-usual needed to meet the reporting cadence. For illustrative purposes, there are two models that reflect the differences in how firms typically approach liquidity reporting: The regulatory reporting-centric model and the treasury-centric model.

The regulatory reporting-centric model places responsibility for liquidity risk reporting with a reporting function that is usually separate from the treasury function. Illustrative pros and cons are:

Regulatory reporting-centric model

Pros include:

  • Informed by regulatory requirements
  • High degree of standardization
  • The option of vendor or managed service solutions

Cons include:

  • Lack of business expertise 
  • Focuses on reporting rather than liquidity management nature
  • May lessen business accountability and responsibility

Treasury-centric model

The treasury-centric model moves the responsibility for liquidity risk reporting closer to the overall treasury function, perhaps even within it. The illustrative pros and cons are:

Pros include:

  • Championed by a key relevant business stakeholder
  • Direct connection to financial and operational risk management
  • Supports data as an asset and inherently more strategic in nature

Cons include:

  • Non-standard process and data models are created 
  • Challenges in determining return-on-investment (ROI)
  • Larger implementation effort relative to the Regulatory-centric model

Neither of the above models is without challenges, and some institutions may face organizational obstacles to using either. However, institutions should consider committing resources and investment toward adopting a framework that moves liquidity reporting from the project-based approach used to develop the reporting capability to a business-as-usual approach supporting liquidity reporting in a sustainable and controlled manner.

Implementation challenges include data availability, fragmented or siloed data and information sources, and line of business resistance to committing resources to the reporting process. Post-implementation pain points include data quality issues, poorly defined submission processes, and an overall lack of ownership; all of which can create problems in responding to questions posed by regulators.

Key takeaway: While firms were able to submit FR 2052a reports to the Federal Reserve, much work remains to mature the data in terms of data quality, completeness, and effective processes. This requires a significant commitment to continuous improvement supported by Treasury senior management.

The case for continuous improvement

The breadth and detail of the 2052a submission required firms to source and aggregate data in unprecedented ways, irrespective of lines of business, products, and entities. The result of this aggregation was a new optic on the overall liquidity of the firm, one that not only had inflow and outflow detail but also provided insights in related areas such as collateral management, counterparty exposures across business lines, and the scope of their inter-entity transactions. For some clients, it was the first instance of combined data from the retail, commercial, wholesale, and broker-dealer lines of business.

With the ratcheting down of some regulatory requirements, the temptation may exist to leave the current data quality and processing “as-is” and to focus resources and investment elsewhere. Doing so, however, would be shortsighted. Now is the time for firms to look for ways to not only improve data quality and sourcing but also to leverage liquidity data to generate benefits and returns. It is time for firms to move up the liquidity reporting maturity curve.

The liquidity reporting maturity concept is illustrated in below figure. This concept is based on our experience that client approaches to liquidity risk management and reporting generally fall into one of these categories:

  • Fragmented
  • Controlled
  • Optimized

Firms in the most immature state, the “Fragmented” state, often hold to a “project-based” approach to liquidity risk reporting, which typically forces them to cope with fragmented data sourcing, uneven data quality, and uncontrolled processes. It is a reactive approach that has attracted regulatory scrutiny. We have observed that “Fragmented” institutions eventually recognize that this reporting process ultimately cannot be scaled and is not sustainable due to inefficiencies, control issues, and resource costs.

The “Controlled” state represents a greater maturity as seen by executive leadership being accountable for aligning liquidity risk reporting to liquidity risk management and by a shared responsibility among key stakeholders (e.g., business, risk, regulatory reporting, and technology). This approach is usually marked by a proactive, firm-wide commitment.

The “Optimized” state is where the firm looks for ways to leverage its liquidity data to generate returns and competitive advantage. These firms recognize the strategic potential their liquidity data. Illustrative use cases range from linking financial planning and analysis (FP&A) to cash flow forecasting to using a high-quality liquid asset (HQLA) and LCR data to manage and reduce liquidity buffer costs.

Key takeaways: Liquidity management is a firm-wide effort requiring senior management buy-in and steering and requiring cross-functional cooperation and focus. FBOs, for example, face the inherent challenge of their Combined US Operation (CUSO) construct, including identification and management of intercompany flows. Other challenges cross both US and foreign institutions. Institutions should align with peers and leading practices to remain in good standing with the regulators and for optimal cost saving and efficiency.

Regulators are looking for continuous improvements and timeline associated with near- and long-term implementation plans for each institution. Liquidity reporting should ultimately be viewed as a journey and should be deeply embedded in day-to-day business decision-making, planning, and operations.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Contact us

Matt Dunn
Managing director | Deloitte Risk and Financial Advisory
US FSI Treasury Leader
Deloitte & Touche LLP


Dmitriy Gutman
Managing director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP


Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP


Chris Spoth
Managing director | Deloitte Risk and Financial Advisory
Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP


David M. Wright
Managing director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP


Ken Lamar
Independent senior advisor
Deloitte & Touche LLP


Chris Hogan
Senior manager | Deloitte Risk and Financial Advisory
US FSI Treasury
Deloitte & Touche LLP


Krisztina Geosits
Senior manager | Deloitte Risk and Financial Advisory
US FSI Treasury
Deloitte & Touche LLP

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