Banks should prepare for tougher standards on liquidity disclosure

Date: Friday, June 4, 2010
Author: Investment Executive

The financial crisis highlighted the critical role that liquidity plays in the financial system, and has revealed the need for more transparency and better disclosure of liquidity levels among banks, experts said on Thursday.

“The absence of liquidity shuts everything down in a pretty big hurry,” said Andrew Kriegler, senior vice president and treasurer at CIBC. “At both a strategic level and a day-to-day tactical level, the liquidity profile of an institution…is very much an integral part of how a bank functions.”

At a panel discussion held by the Toronto CFA Society, Kriegler and other speakers said that the industry should be prepared for more stringent regulations around liquidity disclosure.

Kriegler noted that there is currently a lack of global standards around liquidity and leverage for financial institutions. But proposals by the Basel Committee on Banking Supervision will likely put standards in place within the next two years, he said.

“We’ve got a fairly big set of changes ahead of us on the regulatory side.”

From an investor’s point of view, it’s important to have a clear and detailed picture of a financial institution’s liquidity levels, the speakers said. Donald Chu, director of financial institutions ratings at Standard & Poor’s, said that liquidity is an important component of credit risk analysis, particularly in challenging economic times.

But investors face challenges in objectively comparing firms’ liquidity levels, due to inconsistent disclosure between firms and between countries, said Ian de Verteuil, head of fundamental research at the Canada Pension Plan Investment Board. He calls for regulatory changes to simplify and standardize liquidity disclosure.

“There’s still a lot to be done,” he said. “I think ultimately we’re going to get to a lot more requirements on standardized disclosure.”

The standardization of international financial industry regulations generally would also be positive for the industry, and for global investors, since regulations tend to vary significantly across jurisdictions, de Verteuil said.

“We hope that we’re moving towards standardization across jurisdictions,” he said.

The speakers agreed that Canadian financial institutions are in stronger shape than most others around the world, partly thanks to higher levels of capitalization and liquidity.

“We came through this reasonably well,” Kriegler said. But he added that this doesn’t relieve Canadian banks of their responsibility to manage liquidity and risk carefully.

Even though the financial crisis made clear the importance of liquidity for financial institutions, however, the speakers said firms will not necessarily be inclined to maintain excess liquidity in the future. Boosting liquidity often means sacrificing profitability, according to de Verteuil.

“I don’t think you get a lot of benefit from the excess liquidity,” he said.