Liquidity Risk Management In The New Normal – How Banks In Asia Pacific Can Leverage Crisis-driven Lessons to Strengthen Their Stress-Testing Practices

By Gavin Pugh, Head of APAC Risk Solutions, AxiomSL

Crises often mark a sea change in societies given how they adapt to the problems left in their wake, many of which may seem insurmountable at first glance. When looked at in historical context, crises such as the 1918 Spanish flu pandemic, the financial crash of 1929, and more recent events including the dotcom bubble burst and the 2008 financial crisis all wreaked havoc on the fabric of global society initially, but ultimately ushered in new eras. Strong visionary leadership, access to accurate data and great decision-making skills are required to address each onslaught of challenges – many of which have major effects on the financial sector and global financial health.

Liquidity Risk At The Forefront

Liquidity risk monitoring and regulation gained new-found importance in the aftermath of 2008 – a crisis caused by financial institutions’ excessive risk-taking and the bursting of the United States housing bubble fueled by an era of low interest rates. For monetary authorities and financial institutions alike, the current coronavirus crisis has brought liquidity risk to the forefront again – but more so.

The devastating effects of the pandemic on global financial stability has forced financial authorities around the world to implement unprecedented fiscal and monetary measures to support and stimulate their beleaguered economies. And a range of new liquidity risk factors are evolving. For example, customer deposits have traditionally served as the bricks and mortar foundation upon which banks thrive, but the COVID‑19 crisis is presenting a different scenario where the role of deposits is looking to be less reliable in future lending profiles.

Liquidity Risk Management In The New Normal

Thus, liquidity risk management sits prominently atop every bank’s agenda. As they weather the storm, meet current regulatory requirements to report more liquidity data more frequently, and look to the future – to what may be the new normal in the long term – financial institutions recognize that it is mission-critical to  pay more attention than ever to liquidity risk.

It is said that no crisis should be wasted as something to learn from and the current situation is no exception. While devastating, the coronavirus crisis does create an opportunity for financial institutions to readdress their liquidity risk profiles and reassess their approaches to liquidity risk management, modelling, and stress-testing, including reviewing all possible black-swan scenarios.

With a focus on the crisis’ impact in Asia Pacific, AxiomSL discusses:

  • Actions taken by monetary authorities across the region
  • Need for banks to leverage lessons learned to reassess their liquidity risk management capabilities
  • Viable frameworks for robust liquidity data management, monitoring, and stress testing

Central Banks In Asia Pacific – First Responders

As evidenced by many recent actions across the Asia Pacific region, national monetary authorities have taken drastic steps to provide fiscal relief and prevent irreparable damage to their economies and the financial situations of their citizens. To address liquidity issues, Asian monetary authorities have been quick to implement new measures over the past six months. Some of their actions are discussed below.


  • Support lending: The Monetary Authority of Singapore (MAS) is providing US$60 billion of funding to banks in Singapore through a new MAS/U.S. dollar facility with the objective to support more stable U.S. dollar funding conditions in Singapore and facilitate U.S. dollar lending to businesses both within the country and the region as a whole. The initiative is part of global efforts by central banks to maintain stability and normal functioning of the financial markets.
  • Deferring payments of principle on small and medium-sized enterprise (SME) loans: MAS is allowing SMEs to apply to their lenders to defer principal repayment of their loans until December 31, 2020. It is also allowing them to extend the tenure of their loans up to the corresponding principal deferment period. This relief is available to SMEs that have continued to pay interest and are in good standing with their banks and finance companies, i.e., they are not more than 90 days past due as of April 6, 2020.


  • Support for SMEs: Commercial banks have introduced support packages that include emergency loans to support their SME clients. In addition, they are being more flexible regarding repayments of existing loans and decreasing lending rates.
  • Cutting the reserve ratio: Effective March 20, 2020 Bank Negara Malaysia (BNM) cut its statutory reserve ratio from 3% to 2%, releasing RM30 billion ($6.81 billion) into the banking system to cope with the economic slowdown caused by COVID-19 and declining oil prices.
  • Slashed interest rates: BNM lowered its overnight policy rate by 25 basis points to 2.5% in early March 2020, the second reduction of this benchmark rate in 2020.

Hong Kong

  • Lowering the countercyclical buffer: The Hong Kong Monetary Authority (HKMA) lowered the countercyclical capital buffer to enable banks to support to the domestic economy, particularly those sectors and individuals that are expecting additional short-term stress resulting from the impact of COVID-19. It has also set up banking support facilities to support SMEs.
  • Cutting regulatory reserves: HKMA cut the regulatory reserve requirement for locally authorized institutions by 50%. It has also indicated that the need for locally authorized institutions to maintain regulatory reserves and accounting provisions has diminished, particularly given the notable rise in accounting provisions reported by banks during the second half of 2019.
  • Postponed regulatory stress test for 2020: To provide additional operational capacity for banks to respond to the challenges brought by the pandemic and to continue to support their customers, HKMA delayed the 2020 Supervisor-Driven Stress Test to 2021.


  • Reduction in the reserve ratio: The People’s Bank of China (PBOC) cut the mandatory reserve ratio by 50 to 100 basis points for banks that have met inclusive targets, freeing up to ¥550 billion ($83.5) to support the economy.
  • Adding liquidity to the banking system: PBOC has carried out a medium-term lending facility of ¥200 billion and 7-day reverse repos sessions of ¥100 billion ($14 billion) at an interest rate that is 10 basis points lower than the previous one.


  • Trimmed the liquidity thresholds: The Reserve Bank of Australia (RBA) cut the policy rate by 25 basis points twice in 2020, on March 3 and on March 19, to an all-time low of 0.25 percent. In addition, on March 19, it announced yield targeting on three-year government bonds at around 0.25 percent through purchases of government bonds in the secondary market.
  • Supporting liquidity: Effective March 16, 2020, RBA is conducting one-month and three-month repossession operations daily – until further notice. Repo operations of longer-term maturities of six months or longer are being held at least weekly, and for as long as market conditions warrant them. To assist with the smooth functioning of Australian capital markets, RBA has broadened the range of eligible collateral for open market operations to include securities issued by investment grade non-bank corporations. In addition, it has established a swap line with the U.S. Federal Reserve for the provision of U.S. dollar liquidity in amounts up to $60 billion. To allow banks to more easily lend to SMEs during the period of disruption caused by COVID-19, RBA has also established a term funding facility of at least A$90 billion ($65.5 billion) for access to three-year funding at a rate of 25 basis points.
  • Deferring Basel III reforms: The Australian Prudential Regulation Authority (APRA) has provided temporary relief from its capital requirement, allowing banks to utilize some of their current large buffers to facilitate ongoing lending to the economy as long as minimum capital requirements are met. On March 30, 2020, it announced plans to defer the scheduled implementation of Basel III reforms by one year to January 2023. Based on guidance issued on April 7, 2020, APRA expects banks and insurers to consider dividend payments or approve a dividend at a materially reduced level. APRA has also suspended issuance of new licenses for at least six months in response to the economic uncertainty created by COVID‑19.

Will These Actions Be Enough? No. Preparation is Mission Critical

Monetary authorities can only do so much to redress liquidity issues. Financial institutions need to be properly prepared for the rapid changes currently occurring and expected to continue in the financial landscape to help avert further fallout. They need to be proactive and reassess their stress-testing and behavioral modelling. Their stress-testing frameworks need to be comprehensive, fully integrated and built to encapsulate all aspects of an organization’s business. In many jurisdictions, regulators require firms to have robust stress-testing processes as part of their risk management monitoring. However, even without regulatory obligation, stress testing is increasingly becoming a critical part of assessing institutions’ financial health.

This effort includes recalibrating liquidity stress-testing scenarios to account for the panoply of new risk factors and reviewing worst-case and black-swan scenarios. Organizations should not wait for regulatory mandates before they act, rather, they should integrate ongoing stress-test recalibration into their liquidity risk management processes as a best practice – as soon as possible.

Prognosis: Liquidity Risk Management In The New Normal Requires Thoughtful, Data-Driven, Integrated Stress Testing

For any stress-testing exercise, the most crucial element is getting the data right. For large organizations with multiple data source systems and disparate data structures, it is a challenge to normalize and cleanse the data for gaps and unify the data format, as is required for a fixed data model. Overall standardization can be achieved by an extract, transform, load (ETL) process, which typically takes up to 70% of total implementation time.

 In contrast, a unified data model approach, such as taken by AxiomSL, serves as a bridge between different systems, bypassing the ETL process and enabling banks’ users to source data from upstream systems in native format. Ideally, a unified data model is supported by a data dictionary which serves as a pivot, as it contains all mandatory data attributes, such as unique identifier, counterparty identifier, security identifier, original currency code, and amount in original currency.

The Right Data At The Right Level Of Granularity

A unified flexible, extensible data dictionary architecture acts as a guideline for financial institutions to source the right data at the right level of granularity. In addition, it provides a single source of truth for configuring all business rules, hence providing a single touchpoint for the bank’s maintenance of business rules, which in turn enables comprehensive stress testing.

This approach, taken by AxiomSL, delivers distinct benefits when undertaking stress-testing scenarios, particularly in complex, black-swan type situations. These benefits include:

  • Single source of truth for all regulatory reporting, risk calculations and reporting – leading to synergies across lines of business.
  • Source data can be collected in native format without ETL – leading to significant reduction in implementation time.
  • A single touchpoint for all business rules configuration – reducing maintenance cost and resources.

Healthful Outcomes: AxiomSL’s Liquidity Stress-Testing Framework and Risk Management Ecosystem

AxiomSL’s liquidity solutions are part of a larger ecosystem of extensible data dictionaries, calculations, and reporting business logic brought together on the ControllerView® data integrity and control platform. This holistic environment ensures consistency of attribute definitions and calculations across the Basel framework and beyond.

As depicted below, AxiomSL’s Basel Liquidity Ecosystem enables financial institutions to manage their liquidity risk management and regulatory reporting on a single platform. Solutions running on the platform deliver a comprehensive, data-driven approach to confidently address Basel-driven requirements.

BaselLiquidityEcosystem 1024x470 1

Fully integrated into the liquidity risk management ecosystem, AxiomSL provides a solution framework for delivering stress testing and internal liquidity adequacy assessment processes (ILAAP) based on the Basel ILAAP guidelines. The integrated stress-testing framework is a holistic, technology-driven, and innovative capability which allows financial institutions to create, evaluate, and compare stress scenarios. Highly flexible, it enables institutions to extend the standard tests or add both their own and regulator specific bespoke scenarios using the powerful scenario-configuration engine.

The stress-testing framework’s primary components include:

  • Scenario definition framework: Enables users to create various stress scenarios, both regulatory mandated and advisory scenarios.
  • Scenario executions: Applies stress scenarios to the baseline liquidity dataset to create new scenario specific stressed datasets.
  • Scenario calculations: Generates liquidity results under stressed scenarios, including standard LCR calculation/results and liquidity stress test outputs and analytic reports across scenarios.
  • Dashboards: Delivers scenario inputs and outputs to end users who require building or selecting stress scenarios and viewing and comparing scenario impacts, via various analytic dashboards. Depicted below is the Liquidity Stress Testing summary dashboard showing the Liquidity Buffer view.


LST Dashboard Screenshot 2048x981 1

Liquidity Risk Management In The New Normal – Lessons Learned

It is worth noting that the 1918 influenza pandemic did not originate in Spain. Rather it was called the ‘Spanish flu’ because Spain was a neutral country during World War I and therefore, its media was unmuzzled and could report accurately. Hungry for accurate information, the world under crisis desperately needed this unfettered source of correct data.

Similarly, in today’s crisis-driven rapidly changing economic and regulatory environment, financial institutions in Asia Pacific must must have transparent access to accurate liquidity data, be able to easily manage a range of liquidity risk scenarios with that data, have this information at their fingertips on user-friendly, flexible dashboards, and efficiently meet regulatory reporting requirements.

With a holistic platform for liquidity risk management and solid framework for stress testing, as AxiomSL provides, financial institutions can more effectively traverse the current crisis and be much better prepared for what the future may hold – in the new normal.

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