SGV hosts workshop on FTP and ALM

MG 5 and FSO Advisory recently hosted the second installment of the workshop on Strategic Regulatory Management Series entitled Introduction to Funds Transfer Pricing (FTP) Techniques and Asset-Liability Management (ALM): with Updates on Basel III Liquidity Guidelines and a Discussion on Risk Data Aggregation and Reporting Challenges. This session is a continuation of the topics discussed on 7 August, which tackled capital, leverage and macro-prudential guidelines. More than 30 treasury officers, risk management officers and compliance officers attended this four-hour workshop.

The seminar aimed to brief the Philippine banking industry on the impact of the upcoming Basel III liquidity regulations on business strategies/models, FTP and ALM practices of banks, and the implications on the banks’ risk data aggregation and reporting.

FSRM partner Ian Lauron discussed FTP and reiterated that good FTP practice drives sustainable business models and helps the bank develop its strategies as an effective FTP system captures the real cost of funds used. FTP is part of profitability measurement under the performance management framework. He also discussed the interplay between Basel III, ALM and FTP in the ASEAN context. Director Christian Edmund Chua discussed the regulatory developments on ALM and the impact of Basel III on business models. He discussed how different risks faced by banks interact—liquidity risk is an incidental risk to market, credit and operational risks. He also discussed the Basel III liquidity requirements and how the Philippine banking industry fares on the required ratios. Associate Director Belvin Armenion then talked about the key challenges in risk data aggregation and reporting to meet Basel III regulatory requirements and as management demand improvement on transparency of information. To overcome these challenges, banks need to align risk and finance data, streamline reports to the Board, senior management and regulators, invest in systems and data warehouse, and improve data management architecture.

The Basel Committee on Banking Supervision developed Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and liquidity risk monitoring tools as new Basel III liquidity requirements to promote a more resilient banking sector and ensure that the liquidity crisis that began in 2007 does not happen again. LCR aims to promote short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high quality liquid assets to survive a significant stressed cash outflows lasting for one month. NSFR aims to promote resilience over a one year time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis and has been developed to provide a sustainable maturity structure of assets and liabilities. Liquidity monitoring tools include contractual maturity mismatch, concentration of funding, available unencumbered assets, LCR by significant currency and market-related monitoring tools.

In the Philippines, the BSP has yet to issue an exposure draft of these liquidity requirements. Meanwhile, Hong Kong and Australia have already implemented the LCR but with modifications to fit the local scenario, while Singapore is at the consultation stage of the liquidity regulations draft.

The implementation of revised capital requirements and the upcoming issuance of stricter liquidity regulations urge Philippine banks to rethink their business models and strategies to ensure sufficient profitability. Thus, there is a pressing need to revisit the profitability measurement and ALM processes of banks such as adjusting the FTP to include a spread for cost of liquidity regulations. Banks need to also accelerate its risk data aggregation and reporting capabilities to cope with these challenges and make timely critical business decisions.

The new regulations are expected to impact a bank’s FTP and ALM, and pose a challenge on the bank’s risk data aggregation and reporting, and information technology infrastructure. FTP is an internal process by which banks allocate the net interest margin across its business lines, while ALM is a technique banks use to properly manage assets and liabilities including profitability and liquidity.

The team also includes Senior Associates Gabrielle Denise Aragon, Danica Sarmiento, Margaret Joyce Villanueva, Jemima Vivo, Wella Lou Tandigan and Eduardo Boyose, and Associates Mitchelle Collin Valero, Denise Rancap, Cristine Rose Eroles, and John Arididon. Advisory FMA Carol Aquino and EA Yvette Batalon helped in organizing the event.