Spotlight on Liquidity Risk: Implications for Bank CFOs and CROs

Evolving Regulatory Landscape: Practical Implications for Banks

In this shifting environment, banks must move beyond simply holding liquid assets. They must also demonstrate operational readiness to access central bank liquidity at short notice. Regulators are intensifying their scrutiny of liquidity risk management, with particular focus on deposit concentration, behavioural shifts, and the operational effectiveness of liquidity buffers. There is heightened attention on the treatment of open reverse repos, operational deposits, and interdependent assets in both LCR and NSFR calculations.

CFOs and CROs are now central to optimizing balance sheets, managing collateral, updating risk models, and ensuring that operational and legal processes are robust and regularly tested. An integrated approach is essential for resilience against future liquidity shocks.

1. Integrated Liquidity Management

• Dual Approach: Banks must shift from a “self-insurance only” mindset to a model that combines holding high-quality liquid assets (HQLA) with operational readiness to access central bank liquidity.
• Prepositioning Collateral: Identifying, documenting, and prepositioning eligible collateral with central banks is now critical for rapid mobilization during periods of stress.

2. Operational Readiness

• Testing and Simulation: Regular operational tests and simulations are expected to ensure banks can access central bank liquidity using prepositioned assets.
• Documentation and Legal Review: Robust documentation and legal due diligence are required to ensure collateral can be pledged without delay.

3. Asset Composition and Balance Sheet Strategy

• Asset Eligibility Review: Banks must assess and adjust their asset mix to maximize central bank-eligible collateral, which may impact lending capacity and profitability.
• Balance Sheet Impact: Prepositioning requirements could necessitate holding more eligible collateral, potentially reducing assets available for lending.

4. Supervisory Expectations and Compliance

• New Guidance: Regulators may require banks to demonstrate not just the holding of liquid assets, but also the ability to access central bank liquidity.
• Enhanced Reporting: Greater transparency and reporting on prepositioned collateral and liquidity preparedness will be expected.

 

Recommended Actions for CFOs

Bank CFOs must adopt a dual focus: strengthening core financial resilience and compliance while driving strategic transformation and growth. Proactive liquidity management, digital innovation, regulatory engagement, and talent development are essential to navigating the complex landscape ahead. Immediate priorities include:

Balance Sheet Optimization

• Review asset composition to ensure sufficient eligible collateral for regulatory and central bank requirements.
• Assess the impact of collateral prepositioning on lending capacity and profitability.
• Identify and address gaps in eligible assets.

Strengthen Collateral Management Systems

• Upgrade systems to track, document, and manage collateral for prepositioning.
• Diversify collateral holdings and evaluate the costs and benefits of holding more eligible assets.
• Establish clear processes for legal documentation and operational readiness.

Conduct Liquidity Gap Analysis

• Perform stress tests to identify potential shortfalls under severe liquidity scenarios.
• Model rapid deposit outflows and ensure robust contingency funding plans.

Enhance Cash Flow and Reporting Controls

• Tighten cash flow management to maintain required liquidity buffers.
• Standardize and automate reporting to meet supervisory requirements.

Stakeholder and Regulatory Engagement

• Communicate with regulators to clarify expectations and compliance timelines.
• Brief internal stakeholders on implications and readiness plans.

Operational and IT Adjustments

• Assess and upgrade IT and operational infrastructure to support new requirements.
• Allocate resources for necessary process redesigns.

Develop and Communicate an Action Plan

• Create a prioritized action plan with clear milestones and resource assignments.
• Communicate and monitor progress across all relevant stakeholders.

Conduct Critical Financial Health Assessments

• Liquidity and Cash Flow: Assess current and quick ratios, review cash flow statements, and monitor cash burn rates.
• Profitability and Margins: Evaluate gross and net profit margins, ROA, and ROE.
• Balance Sheet Strength: Review debt levels, leverage ratios, and asset quality.
• Interest Coverage: Ensure earnings sufficiently cover interest expenses.
• Compliance Readiness: Analyze audit outcomes and conduct regulatory gap analysis.
• Forecasting and Scenario Planning: Use rolling forecasts and stress testing to anticipate liquidity needs.

Recommended Actions for CROs

CROs must take a structured, forward-looking, and integrated approach to regulatory risk, aligning compliance with strategic business impacts.

Comprehensive Regulatory Impact Assessment

• Map new requirements (e.g., Basel 3.1, ESG, operational resilience) to current risk frameworks.
• Identify gaps in liquidity, capital, and collateral management.

Enhanced Stress Testing and Scenario Analysis

• Update models to reflect more severe and rapid stress scenarios.
• Incorporate new risk factors, such as digital bank runs, climate risk, and cyber threats.
• Assess intraday and short-term liquidity risks.

Operational and Data Readiness

• Ensure high-quality, integrated data across risk, finance, and treasury.
• Test operational processes for collateral mobilization and central bank access.

Strategic Risk Mapping

• Align risk appetite and business strategy with the new regulatory landscape.
• Embed risk considerations into business planning and decision-making.

Regulatory Engagement and Horizon Scanning

• Maintain proactive communication with regulators and monitor developments across jurisdictions.

Cost, Innovation, and Competitiveness Analysis

• Quantify compliance costs and assess trade-offs with innovation and strategic priorities.

Risk Culture and Governance

• Foster a strong risk culture with early risk identification and transparent reporting.
• Ensure board and executive oversight of regulatory risk assessments.

Shared Priorities for CFOs and CROs

CFOs and CROs must coordinate closely to balance regulatory compliance with business growth. This includes optimizing balance sheets, strengthening liquidity and risk controls, investing in technology, and maintaining strategic flexibility. Effective communication with boards, regulators, and internal stakeholders is essential to align expectations and ensure readiness for ongoing regulatory change.

Evolving Regulatory Landscape: Practical Implications and Emerging Challenges

Banks that view these changes as an opportunity to modernize their risk and treasury functions will be best placed to thrive. Those that lag risk regulatory censure, reputational damage, and strategic disadvantage.

While the regulatory bar continues to rise, the real-world challenge for banks is twofold:

1. Demonstrating Real-Time Liquidity Readiness:
   Regulators are moving beyond static metrics. They now require banks to evidence their ability to mobilize collateral and access central bank liquidity—often within hours, not days. This demands seamless integration between treasury, risk, legal, and IT.
2. Managing New and Complex Risks:
   The digitalization of banking has increased the risk of rapid deposit outflows (“digital bank runs”) and heightened the need for scenario modelling that captures behavioural shifts, market volatility, and climate-related liquidity shocks.

Key Pain Points We See in the Market

• Siloed Data and Legacy Systems: Many banks struggle to aggregate real-time data across business lines, hampering their ability to make informed liquidity decisions under stress.
• Manual Collateral Processes: Outdated documentation and fragmented collateral management slow down access to central bank funding.
• Regulatory Uncertainty: Frequent updates and jurisdictional differences make it difficult for banks to maintain a future-proof compliance posture.

How Leading Banks Are Responding

Forward-thinking institutions are investing in:

• Integrated Data Platforms: To unify risk, finance, and treasury data for real-time analytics and reporting.
• Automated Collateral Management: Leveraging technology to digitize documentation, track eligibility, and preposition assets efficiently.
• Advanced Scenario Modelling: Using AI and machine learning to anticipate liquidity needs under a variety of stress scenarios, including cyber and climate events.
• Regulatory Intelligence Tools: To monitor and interpret evolving requirements across multiple jurisdictions.

How We Can Help: Advisory and Technology-Enabled Solutions

Our team partners with banks to deliver end-to-end solutions that address both immediate compliance needs and long-term strategic goals. Here’s how we make a difference:

1. Digital Liquidity Risk Transformation

• Liquidity Risk Assessment: We conduct holistic reviews of your current frameworks, identifying gaps against best-in-class standards and regulatory expectations.
• Target Operating Model Design: We help you design and implement integrated risk and treasury operating models, breaking down silos and enabling faster decision-making.

2. Technology-Enabled Collateral and Treasury Management

• Smart Collateral Platforms: Our solutions automate collateral eligibility checks, documentation, and prepositioning—reducing operational risk and improving speed to funding.
• Real-Time Dashboards: We deploy dashboards that provide instant visibility into liquidity buffers, stress test outcomes, and regulatory metrics.

3. Advanced Analytics and Scenario Planning

• AI-Driven Stress Testing: We build and calibrate models that simulate a wide range of stress events, including digital runs and climate shocks, giving you a forward-looking view of vulnerabilities.
• Dynamic Reporting Engines: Our technology automates regulatory and internal reporting, ensuring accuracy and freeing up valuable resources.

4. Regulatory Change Management and Horizon Scanning

• Regulatory Intelligence: We provide ongoing monitoring and interpretation of regulatory changes, helping you stay ahead of the curve.
• Implementation Support: From policy updates to system integration, we guide you through every step of the compliance journey.

5. Change Enablement and Talent Uplift

• Training and Capability Building: We offer tailored training programs to upskill your teams in the latest liquidity risk practices and technologies.
• Change Management: Our advisors ensure your people, processes, and technology are fully aligned for sustainable transformation.

The evolving regulatory landscape presents both challenges and opportunities. By taking a proactive, integrated approach to liquidity risk management, CFOs and CROs can ensure their institutions remain resilient, competitive, and compliant—well-prepared to navigate the uncertainties of 2025 and beyond.

 

Why Engage with Us?

• Proven Track Record: We have successfully delivered liquidity risk transformations for leading banks globally, helping them achieve regulatory compliance and operational excellence.
• End-to-End Partnership: From strategy to execution, we offer seamless support across advisory, technology, and change management.
• Innovation-Driven: Our solutions harness the latest in AI, automation, and data analytics to future-proof your liquidity risk management.

Let’s Start the Conversation

As regulatory expectations continue to evolve, the cost of inaction grows. Whether you are seeking a rapid compliance uplift or a strategic transformation of your liquidity risk capabilities, we are ready to partner with you.

Contact us today to schedule a discovery session or request a tailored demonstration of our technology-enabled liquidity risk solutions. Let’s work together to ensure your institution is not only compliant, but resilient and competitive in the years ahead.

For further insights or to discuss how your institution can enhance its liquidity risk management framework, please contact Kishore Ramakrishnan.