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ICAEW Summary on Technical Advice on Liquidity Risk Management (Second Part)

Introduction

The Institute of Chartered Accountants in England and Wales (ICAEW) has submitted comments on the CEBS Consultation Paper titled "Technical Advice on Liquidity Risk Management (Second Part)" issued in June 2008. The Institute supports the initiative as a significant step in addressing liquidity risk, which is both complex and critical for financial stability.

Who We Are

• ICAEW is a world-leading professional accountancy body, operating under a Royal Charter.
• It regulates its members, including auditors, under the oversight of the Financial Reporting Council.
• The Institute has over 130,000 members in more than 140 countries and is a founding member of the Global Accounting Alliance with more than 700,000 members worldwide.
• Members are trained to challenge organizations to improve their financial practices and ensure clarity and rigour in financial reporting.

Major Points

General Support for the Initiative

• ICAEW welcomes the CEBS paper as a helpful attempt to address liquidity risk management.
• It emphasizes the importance of balancing minimum supervisory requirements with flexibility for firms to choose their business models.
• Some recommendations, such as the prescriptive nature of Recommendation 2, may not achieve this balance.

Key Focus Areas

1. Quantitative Limits

   • ICAEW agrees that an effective liquidity policy should be principles-based, allowing flexibility for different risk profiles.
   • However, they believe that some form of quantitative requirements is necessary for an effective liquidity regime.
   • They suggest that these should be based on the systematic capture of potential cash flows and their assessment under stressed conditions.
   • Internal modeling and qualitative standards are seen as more appropriate than a one-size-fits-all approach.
   • The use of modeling can help senior management focus on key liquidity assumptions.

2. Transparency and Disclosure

   • ICAEW has reservations about Recommendation 18, which calls for disclosure of liquidity risk information.
   • They question the effectiveness of current disclosures, noting that longer disclosures do not necessarily mean more useful information.
   • There is concern that in a crisis, transparency may not always be helpful, as it could signal distress.
   • They stress the need for regulatory consistency and clarity in interpreting the recommendation.
   • The rapid deterioration of liquidity positions, as seen in the case of Bear Stearns, highlights the importance of timely and accurate disclosure.

Additional Comments on Specific Recommendations

• Recommendation 2: ICAEW supports the idea of an internal liquidity cost/benefit allocation mechanism, but emphasizes the need for materiality and proportionality in applying it.
• Recommendation 24: They believe stress testing is important, but firms need guidance on the type and size of shocks to consider, and on acceptable modeling techniques.
• Recommendation 29: ICAEW suggests that the analysis of branch liquidity should be reflected more fully, and that the recommendation should include a focus on facilitating the delegation of supervision tasks.

Conclusion

ICAEW advocates for a balanced approach to liquidity risk management, emphasizing the importance of principles-based policies with necessary quantitative standards. They also highlight the need for improved transparency and disclosure practices, while cautioning against over-disclosure that could inadvertently signal distress. The Institute encourages regulators to provide clear guidance and to use existing internal data for liquidity management purposes.