Internal Audit Support – Liquidity Risk Management

SUMMARY

Avantage Reply assisted the internal audit department of a leading Private Bank in the Eurozone, a less significant institution (LSI) that is part of an international group.

Following the supervisory review and evaluation process (SREP), the bank received a letter from the respective national Central Bank highlighting a number of weaknesses concerning its liquidity risk management framework and outlining a number of recommendations the bank needed to implement. The bank submitted a response to the competent supervisory authority committing to implement these recommendations in advance of its submission of the 2020 Internal Liquidity Adequacy Assessment Process (ILAAP). After the bank’s internal remediation and implementation, the bank requested assistance from outside experts in liquidity risk management to support the internal audit function in the review and confirmation that the required enhancements, as outlined in the letter, were implemented to satisfactory standards.

CUSTOMER GOALS

The customer’s goal had two main aspects:

1. Enhancement of the internal audit expertise in the liquidity risk management by on-boarding external liquidity expert(s);
2. Confirmation and validation that the required enhancements were implemented to a satisfactory level.

CHALLENGES

There were two primary challenges:

• The simultaneous work on the 2020 ILAAP put strain on the internal resources to be able to provide the required proof for the validation while incorporating the changes into the ILAAP report;
• The responsibility for the liquidity risk management was spread out across multiple teams and departments, which 1) made the process review more challenging and 2) made it difficult to ensure that the controls are followed in a strict and consistent manner.

SOLUTION

Avantage Reply approached the problem in a structured and efficient manner, tackling the internal review by systematically executing numerous tasks:

• Interviewing of all relevant stakeholders;
• Reviewing the relevant internal policies and procedures;
• Reviewing the relevant reports of the daily activities and management reporting;
• Reviewing any exceptions/breaches of the limits and the actions taken;
• Reviewing the meeting minutes and approvals of the framework;
• Reviewing the relevant controls;
• Participating in the walkthrough of the implemented tool(s).

The overall deliverable from the assignment was a comprehensive memo documenting the approach and key findings from the review. The memo assessed the following areas:

• Status of the implementation of the Intraday Liquidity Reporting tool (ILR), aligned to regulatory intraday monitoring and reporting requirements, and its inclusion in the 2020 ILAAP report;
• Progress made with regards to developing intraday liquidity stress testing and the inclusion of this in the 2020 ILAAP report;
• Adequacy of the intraday liquidity buffers and thresholds and its inclusion in the 2020 ILAAP report;
• The consistency of the bank’s liquidity regulatory reporting;
• Status of the automation of the regulatory liquidity reporting;
• Progress made with regards to the development of processes and procedures for regulatory liquidity reporting;
• Review of the current governance process around regulatory reporting.