Big Four

Corporate level liquidity risk named number one regulatory concern

KPMG’s annual Risk and ICAAP benchmarking survey, Safe from Harm, revealed that the biggest concern in the asset management sector was corporate level liquidity risk.

It found that most firms subject to a regulatory visit in the past four years had liquidity risk “raised as an area of weakness”.

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Last year, operational risk modelling was the number one regulatory concern for UK regulators

However, KPMG says that firms are “moving in the right direction”.

Only 10% of firms have no corporate liquidity risk management framework in place, whereas last year this figure was 17%. 

Another improvement throughout the year was the number of firms performing liquidity stress tests separate from capital stress testing. Only 30% of firms performed this last year, whereas 79% did so in 2019.

KPMG also said that firms were “getting more realistic in assessing their capital requirements”.

The median difference in what was calculated by regulators and calculated by the firms themselves was only 28% in 2019, down from 39% the year prior. 

However, whilst this overall gap between firms’ and regulators’ expectations has narrowed, KPMg say firms still “fall quite far shy of the mark”.

The survey also found that 69% of firms have failed to prepare for new EU regulation, IFR, which is expected to come into force in June 2021. This regulation is  “broadly expected” to once alter firms’ capital requirements and financial resources. 

David Yim, asset management partner and author of the report, said: “It is encouraging to see continuing improvements in firms’ prudential risk management.

“Whilst fund level liquidity management has shot into the limelight this year, the regulator has consistently focused on corporate level liquidity for at least two of the five years we’ve been reporting on ICAAP.” 

He added: “So, it’s good to see that their focus is now paying off with more firms having frameworks in place and indeed, stress testing those frameworks. 

“However, the focus on liquidity doesn’t seem to be playing through into more effective wind-down plans. Half of firms haven’t considered the risks to their wind-down plans and a quarter of firms haven’t worked out what their liquidity requirements would likely be in a wind down scenario.”

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