Capital Regulatory Reporting

Regulatory reporting of capital and liquidity is necessary because:

• It obliges banks to monitor their capital adequacy and liquidity risk on a daily or intra‐day basis;
• The data required by the regulator would normally be required by firms for their own purposes in undertaking prudent risk management;
• It enables the regulator to identify and challenge outliers;
• Supervisors can apply their own stress testing scenario analysis to data provided by a firm;
• It enables the regulator to form firm specific, sector, and industry‐wide views on capital adequacy and liquidity risk during good and bad times, and provide feedback to firms on their positioning within their peer group.

Liquidity Regulatory Reporting

We examine the evolution of liquidity regulatory reporting through the eyes of the European regulators, notably the Prudential Regulatory Authority (PRA) and the Basel Committee on Banking Supervision (BCBS).

During the early “liquidity phase” of the financial crisis that began in 2007, many banks – despite adequate capital levels – still experienced difficulties because they did not manage their liquidity in a prudent manner. The crisis drove home the importance of the industry having a standard set of liquidity metrics to correctly assess the state of the participants in the financial markets and the banking sector.

The PRA introduced a series of new liquidity reporting standards called the ILAS stress test effective from 1 December 2009² established under the Policy Statement entitled “Strengthening liquidity standards”. This regime focused on a 3M stress test, which needed to be adequately covered by a prescribed set of liquid assets. The stress test has a prescribed set of outflow assumptions and was standardised in its approach. It enabled the PRA to consistently assess the liquidity positions of each banking institution in the market simultaneously. The banks reported to the regulators on a Monday the Friday's close of business position and subsequent qualitative discussions followed. This was founded under the overarching principle outlined in BIPRU 12.2.1R:

“ A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due”.

The PRA followed a principle‐based approach for the overall framework while using a more prescriptive approach for reporting and quantitative measures.

The key elements of this regime included the following:

• Over‐arching principles of self‐sufficiency and adequacy of liquidity resources;
• Enhanced systems and control requirements, which implement the Basel Committee's updated Principles for Sound Liquidity Risk Management and Supervision;
• New quantitative requirements, coupled with a narrow definition of liquid assets;
• A new modifications regime for branches and subsidiaries; and
• Granular and frequent reporting requirements.

This set of monitoring metrics was designed to assist supervisors in the analysis of bank specific and system wide liquidity risk trends. Whilst this practice had already existed in the UK since the introduction of the Independent Liquidity Assessment Supervision (ILAS) regime under BIPRU 12, there was no single worldwide standardised set of metrics to evaluate the quantum of liquidity risk in the banking sector.

The relevance of the framework established by the PRA was that it founded the basis of the Liquidity Coverage Ratio and Net Stable Funding Ration³ established by the Basel Committee in January 2013, which built on the standards set out in the 2008 Principles for Sound Liquidity Risk Management and Supervision⁴.

See Chapter 12 for detail on the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and a discussion on potential business model impacts of the requirement to adhere to these funding metrics.

From a reporting perspective, the LCR should be produced on an ongoing basis to help monitor and control liquidity risk. The LCR should be reported to supervisors at least monthly and in most instances weekly, with the operational capacity to increase the frequency to weekly or even daily in stressed situations at the discretion of the supervisor. Banks are expected to meet the NSFR requirement on an ongoing basis and the NSFR should be reported at least quarterly. Over time, it is expected that the NSFR reporting frequency aligns to that prescribed for the LCR.

Reporting Requirements to Regulatory Authorities

In order to ensure a high level of consistency and harmonisation, the European Banking Supervisors (EBA) devised a set of guidelines and reporting requirements covering all aspects of Basel III. These are titled “Guidelines on Common Reporting” (COREP) which form part of the overall CRD IV EU legislative package. This section will focus on the elements of COREP that apply to the reporting of key liquidity metrics pertaining to LCR and in the future will cover NSFR, which is currently covered by separate legislation under Capital Requirements Regulation (CRR).

The European Banking Authority (EBA) is specifying all liquidity reporting data requirements for via COREP and this will continue to be collected via the Financial Conduct Authority's (FCA) GABRIEL system. The GABRIEL system was introduced under the BIPRU 12 regime in 2009. It is the PRA's centralised online system for collecting and storing regulatory data on firms.

In the UK, the sole reporting format for this data will be via XBRL (eXtensible Business Reporting Language), which is a global standard for exchanging business information. This will cover all data currently included within the EBA Implementing Technical Standards (ITS).

Under the EBA ITS standards, the following reporting frequencies have been agreed:

• Monthly reporting: on the last day of each month;
• Quarterly reporting: 31 March, 30 June, 30 September, and 31 December;
• Semi‐annual reporting: 30 June and 31 December;
• Annual reporting: 31 December.

In times of stress, it is expected that these metrics can be run on a daily basis and some regulators are asking to see these numbers on a weekly basis. Whilst this is not hard wired into the regulations, it is a request being made and one that banks can easily adhere to given that they will be managing these ratios on a daily basis to ensure adherence.

In addition to the reporting frequencies, the ITS also specified the template format that need to be populated. This is to ensure that all firms are reporting the key liquidity metrics in a standardised controlled format. These templates can be found on the EBA website⁵.

These templates (for LCR) are broken down into the following main components:

• Template C72.00 of Annex XXIV Liquidity coverage: liquid assets broken down into the qualifying components Level 1 assets or as Level 2 assets in accordance with Chapter 1and 2 of Title II of the delegated act and which comply with the general requirements set out in Article 7 as well as the operational requirements defined in Article 8 of the LCR delegated act;
• Template C73.00 of Annex XXIV Liquidity coverage: liquidity outflows measured over the next 30 days, for the purpose of reporting the liquidity coverage requirement as specified in the delegated act. This template contains both outflows from unsecured transactions / deposits and from liabilities resulting from secured lending and capital‐market driven transactions;
• Template C74.00 of Annex XXIV Liquidity coverage: liquidity inflows measured over the next 30 days, for the purpose of reporting the liquidity coverage requirement as specified in the delegated act. This template contains both inflows from unsecured transactions / deposits and from secured lending and capital‐market driven transactions;
• Template C75.00 of Annex XXIV Liquidity coverage: collateral swaps maturing within 30 days in which non‐cash assets are swapped for other non‐cash assets;
• Template C76.00 of Annex XXIV Liquidity coverage: calculation of the LCR for the purpose of reporting the liquidity coverage requirement as specified in the delegated act.

The reporting requirements outlined for NSFR are covered under the Capital Requirements Regulation (CRR) and follow the templates outlined in the Quantitative Impact Study (QIS). These templates can be found on the Bank for International Settlements (BIS) website⁶ under the tab entitled NSFR. The reporting frequency of these templates is designed to be in line with the publication of financial statements, which typically is on a quarterly, semi‐annual, and annual basis. Further information can be obtained on the BIS website contained within the “Net Stable Funding Ratio disclosure standards”⁷. Note that at time of writing the final form of NSFR calculation and assumptions is still to be published. LCR was the first metric to go live while NSFR should go live in 2019. There is still a lot of work to agree the templates and reporting frequencies around NSFR, but the dates that have been outlined in this chapter are good proxy for what the market expects to occur.

Intra‐day Risk Monitoring and Reporting

In April 2013, the Basel Committee on Banking Supervision (BCBS) published the requirements “Monitoring tools for intra‐day liquidity management”. The document referenced as BCBS248 set out the key metrics that need to be monitored and reported to the regulator. The management of intra‐day liquidity risk is probably one of the more challenging liquidity risks to manage by the simple nature that it requires up to the minute data on transaction information that is occurring real time in the bank.

Intra‐day liquidity and risk were described in Chapter 12.

Baseline Approach

It is very important that every aspect of balance sheet risk management is articulated in a formal policy document, approved at ALCO. This is to ensure that every stakeholder is aware of the requirements, operating procedures, and minimum / maximum tolerances of the bank relating to any and all factors that impact the balance sheet.

Policies should be reviewed by ALCO on a regular basis; depending on the type of policy in question we suggest once every 6 to 12 months. Drafting and ownership responsibilities of each policy must be known by all relevant bank staff and appropriate stakeholders.

The key principles underpinning policy documentation are as follows:

• Ownership and drafting responsibilities clear;
• Transparent, accessible language;
• Principle objectives of the policy clear;
• Who is affected by the policy;
• Regular review timetable;
• Relevant procedures and guidelines that form part of the policy;
• Balance sheet limits.

The Treasury (or possibly, Risk) must ensure that all critical aspects of the balance sheet management function are covered with the appropriate and relevant policy. For example, at every bank these would be expected to include:

• ALM policy standard;
• Liquidity management policy (and subsets of this policy thereof);
• Capital management policy;
• Dividend policy;
• Liquid asset buffer (LAB) policy;
• IRRBB policy;
• FX assets–liabilities policy;
• ALCO ToR formulation;
• ALCO papers submission template;
• Asset encumbrance policy;
• Funds transfer pricing policy;
• Securities issuance policy;
• Market risk hedging policy;
• Standard templates.

At this stage it is important to define, if only loosely, what a “policy” is and show how it differs from other forms of rulebooks or instruction manuals. The box below differentiates a policy from, in turn, a guideline, a procedure, and a “standard” (although some commentators refer to “policy standards” which does confuse things).

Template Policy Format and Submission Process

We show the author's own recommended template for a policy format at Figure 15.5. This example is a funding concentration policy, however the layout and format is the author's recommended standard template. This may be applied to any policy within the Treasury, Risk, or Finance space, and indeed most parts of the bank.

The process of submitting a paper for approval – whether by ALCO, or any other committee up to Board level – should also be contained in a policy document. The process should also supply a standard template for all paper submissions which all business lines must use. We illustrate a recommended process for approval submission in the box below. In this example, the process described is for those business lines wishing to issue private placement or public capital market instruments such as medium‐term notes or structured notes. The approval authority in question is the Security Issuance Committee.