Learning Objectives
As a result of this training, participants will:

• Understand how liquidity risk arises;
• Know how liquidity risk and poor management of it crystallised during the credit crisis, how banks learnt from it and how regulators responded to it
• Understand the evolution of the Basel accords, in particular from Basel II to III and the motivation of the regulators in introducing it
• Develop an awareness of why banks preferences for funding has swung from wholesale to non-wholesale, what the differences are between the two
• Learn of the importance of behaviouralisation of balance sheets, coupled with FTP mechanisms is in valuing non wholesale liquidity sources
• Know how the components and calculations for LCR and NSFR, the impact of both on banks cost base and how banks are adopting them in terms of balance sheet and product strategies
• Learn how banks stress test their liquidity position and recognise the dangers of hidden drains on liquidity
• Gain insight into how the post crisis regulatory regime is shaping, in particular regulatory liquidity requirements are shaping the banking industry of tomorrow

Day One

Sessions 1:
Introduction - lessons from a crisis
• Introduction to the course, to each other and defining Liquidity Risk
• Causes of the credit crunch, how funding costs varied during it, gaps in liquidity risk management and failures due to it
• What restored confidence – co-ordinated global central bank intervention
• The market place today and how funding portfolios have changed
Activity: Group discussion/presentation on causes and impacts of the credit crisis and lessons relevant to liquidity risk

Session 2:
The response of regulators – a focus on quality
• A recap on the structure of the balance sheet
• From I to II to III – the evolution of the Basel accords
• Overview of key capital ratios highlighting impact of leverage ratio
• Introduction to the liquidity regime – NSFR and LCR
• Impact of higher quality on banks profitability, their response to it and regulators motivation for it
Activity: Review of relevant financial statements and identification of key balance sheet regulatory ratios

Session 3:
Lesson for banks – risks in over reliance on wholesale funding
•  Examples and characterisations of wholesale funding instruments
•  Examples of non-wholesale funding instruments – what is operational vs non-operational
•  What makes non-wholesale funding ‘sticky’ compared to wholesale
•  ‘Behaviouralisation‘ – term value beyond contractual value, it’s significance in how banks match funding to assets and current themes in its derivation
• Funds Transfer Pricing (FTP) – considering the ‘true value’ of liquidity and ‘true cost’ of assets
Activity: Calculation of weighted average life and blended FTP rate for a current account portfolio, from data provided

Session 4:
Liquidity Coverage Ratio (LCR) Part 1
• Defining LCR and the regulators ambition for it
• The numerators – what qualifies as ‘HQLA’ and the rules that apply for Level 1, 2a and 2b
• Yields on HQLA and opportunity cost of holding
• The denominator – outflows for deposits, undrawn commitments and allowed inflows on assets
Activity: Identifying HQLA, outflows and inflows from a balance sheet provided and calculating LCR

Day Two
Session 1:
Liquidity Coverage Ratio Part 2
• The impact of LCR on banks funding costs
• Challenges in data segregation/implementation
• Potential balance sheet and product optimisation/mitigation strategies
• Non balance sheet considerations in attracting LCR ‘friendly’ balances
Activity: Combining data and results from previous 2 exercises to calculate worth of funds net of LCR ‘charge’

Session 2:
Net Stable Funding Ratio (NSFR)
•  Defining NSFR and the regulators ambition for it
•  The numerator - what qualifies as and allowances for Available Stable Funding
•  The denominator – what qualifies as and charged for Required Stable Funding
•  Impact of NSFR on banks costs and strategies
Activity: Identify ASF and RSF components from a balance sheet provided and subsequently calculate NSFR

Session 3:
Beyond LCR and NSFR – liquidity stress testing
• Benefits of further stress testing (beyond Pillar I) and how it compliments LCR/NSFR
• Sources of funding and liquidity risk
• The role of the liquidity buffer
• Pragmatic considerations in stress testing e.g. controlling the asset pipeline
Activity: Run simplified liquidity stress tests on a banks balance sheet and present conclusions

Session 4:
Other considerations
• The non-funding value of liquidity – a wedge product for banks
• Net Funding Generation capital drain vs margin decompression
• Overview of other relative regulation including Dodd Frank S165,  FSB TLAC consultation
• Exploring Banking 2020 with foresight – how is the banking industry likely to change over the next 5 years and why
• Wrap up
Activity: Group presentations on how liquidity regulation will shape banks in years to come with Q&A