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Risk and ICAAP benchmarking survey 2019

Risk and ICAAP benchmarking survey 2019

KPMG’s annual Risk and ICAAP benchmarking survey, Safe from Harm, finds the UK regulator’s number one concern for the asset management sector this year is corporate level liquidity risk.

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David Yim - Partner

Partner

KPMG in the UK

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Highlights:

  • Corporate level liquidity risk rises to number one regulatory concern 
  • Average capital increase imposed by the regulator has gone from 39% to 28% 
  • 69% of firms have done no preparation for incoming EU regulation – Investment Firm Regulation

This replaces operational risk modelling which topped the list in 2018. However, firms are moving in the right direction. Whilst last year, just 17% of firms had no corporate liquidity risk management framework in place, this year, that figure has fallen to 10%. Stress testing was an area of more significant change in the case of corporate liquidity. Whereas last year only 30% of firms performed liquidity stress tests that were separate from capital stress testing, this year has seen a rise in the practice, with 79% of firms doing so.

Firms are also getting more realistic in assessing their capital requirements. The median difference between what regulators calculate, and what firms themselves calculate, was 28% in 2019, down from 39% last year. Whilst overall the gap between firms’ and regulators’ expectations has narrowed year-on-year since our report began, firms still fall quite far shy of the mark.

69% of firms have done no preparation for new EU regulation – Investment Firm Regulation (IFR). IFR is expected to come into force in June 2021 and it is broadly expected to once again alter firms’ capital requirements and financial resources. The very fact that early discussion papers on IFR refer to “financial resources” demonstrates the continued emphasis that will be placed on liquidity management moving forward.

David Yim, Partner in the UK: “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. 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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