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Welcome! Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges.

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1 Welcome! Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges

2 Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges
Agenda 6.30 – 6.35: Welcome - PRMIA Steering Committee member Donald Lawrence, UCL 6.35 – 6.45: Introduction to the day’s event by Vijay 6.45 – 7.30 (flexible): Opening remarks by Kumar (FSA) followed by Arno Commerzbank) 7.30 – 8.00 (flexible): Panel discussion 8.00 (flexible) onwards: Drinks at the Bar and networking

3 UCL - PRMIA Course A Complete Course in Risk Management
6 – 10 February, 2012, London Day 1: Foundations of Risk Measurement and Risk Finance Theory Day 2: Financial Markets & Instruments; Market Risk Management Day 3: Credit & Operational Risk Management Day 4: Capital Allocation and Liquidity Risk Management Day 5: Crisis Management and Non-Market Risk

4 Global Risk Conference
Save the date! 10th Anniversary PRMIA Global Risk Conference 14th-16th of May 2012 Marriot Marquis, NY Visit

5 Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges
Arno Kratky - Head of Liquidity Analytics, Group Treasury, Commerzbank Kumar Tangri - Risk Specialist, ALM & Liquidity, FSA Vijay Krishnaswamy - Partner and Head of Enterprise Risk Management, Hymans Robertson

6 FTP regulations: A clear view on the horizon?
Welcome & Introduction & Thanks Time line for speech Discussion to follow at end Kumar Tangri 6

7 Today’s Agenda How are regulations incorporating FTP into liquidity management Will FTP play a larger role in future regulation Things to look out for

8 Overriding message Good Funds Transfer Pricing practice drives sustainable business models. Messages from Funds Transfer Pricing help develop strategy

9 Funds Transfer Pricing – what is it?
Funds Transfer Pricing (FTP) is the mechanism by which the cost, benefits and risks of liquidity is reflected to a firm’s business lines – i.e. a sophisticated, forward looking pricing model. It is an internal measurement and allocation process that assigns a liquidity risk-adjusted profit contribution value to funds gathered and lent or invested by the firm. FTP is one aspect of full Transfer Pricing, which builds hurdle rates by inclusion of cost of capital (for instance for credit risk). Traditionally transfer pricing also used in: Taxation Fixed cost contribution accounting, e.g. cost of branches These are out of scope for today’s talk.

10 How are regulations incorporating FTP into liquidity management
BIS - Principles for Sound Liquidity Risk Management and Supervision [Sept 2008] {Principle 4} FSA – PS09/16, Strengthening Liquidity Standards [October 2009] {BIPRU E} {BIPRU12.5.4R} EBA – CP36 Guidelines on Liquidity Cost Benefit Allocation [March 2010] Basel Necessity of allocating liquidity costs benefits and risks to all significant business activities

11 How are regulations incorporating FTP into liquidity management
PS09/16, Strengthening Liquidity Standards {BIPRU E} States that firms should accurately quantify liquidity costs, benefits and risks for product pricing performance measurement and incentives new product approval Applies to significant business activity – on and off balance sheet Consider FTP in normal and stressed conditions Clear and transparent – needs to be understood across the business 11

12 How are regulations incorporating FTP into liquidity management
PS09/16, Strengthening Liquidity Standards {BIPRU12.5.4R} Requires firms to include assessment of compliance with BIPRU12.3 and BIPRU12.4 (systems and controls requirements) in the ILAA Compliance influences ILG 12

13 Will FTP play a larger role in future regulation
Andrew Bailey, Executive Director, Bank of England and Director, UK Banks and Building Societies, FSA - Santander International Banking Conference 2009 “fire prevention is better than fire-fighting. We cannot justify having a banking system that depends on the use of public money to douse the fire when the crisis comes. And we also cannot allow conditions to exist where risks are taken on the basis that this backstop exists.” – Santander International Banking Conference 2009 13

14 Will FTP play a larger role in future regulation
Withdrawal of taxpayer support – whether implicit or explicit Solo self sufficiency and sustainable business models Recovery and Resolution Planning Good Funds Transfer Pricing practice drives sustainable business models. 14

15 What do and will regulators expect
FSA Dear Treasurer letter on Funds Transfer Pricing (http://www.fsa.gov.uk/pubs/international/ftp_treasurer_letter.pdf) Benefits and pitfalls Benefits Informs business strategy by identifying the liquidity risk adjusted return from business activities. It helps prevent firms “sleep walking” into business where the true cost of funding is not covered. Contributes to a sustainable business model. Consequence of poor FTP Misallocation of liquidity resource – like capital, liquidity is scarce and needs to be used wisely. Conduct of loss making business or business where reward is not commensurate with risk. In the past poor or non-existent FTP may have been hidden by wide business margins. It is much more important now to get it right as margins are squeezed. 15

16 What do and will regulators expect
Things to look out for FTP governance – who owns and challenges the model? Can it be gamed or arbitraged? Is it transparent to stakeholders? Is treasury conflicted? What components are charged? Is the cost of liquidity buffer recharged? Are all aspects of liquidity risk accounted for? E.g. intra day liquidity, FSCS costs Is FTP accurate? Does it capture marginal costs? Can it be back tested? Are there un-priced risks? Approach to back book – does this distort new product pricing?

17 What do and will regulators expect
Things to look out for How detailed is FTP? Is it granular enough to influence strategic and day to day transaction decisions? E.g. does it distinguish between asset origination which can be securitised versus assets that can’t? Does it incentivise appropriate business line behaviours? SHOULD ENCOURAGE APPROPRIATE INCENTIVES – TO WRITE AN OPTIMAL BUSINESS MIX FRAMEWORK SHOULD BE PROPORTIONATE TO FIRMS’ SCALE AND COMPLEXITY - E.g. Frequency with which prices are reviewed, frequency of back testing

18 Funds Transfer Pricing – hurdle rate

19 FTP practices – marginal costing
What do and will regulators expect FTP practices – marginal costing 19

20 Funds Transfer Pricing – marginal costing
Yield (%) Weighted average cost, back book Time (t) 20

21 Funds Transfer Pricing – marginal costing
Pros Correctly captures the cost of doing new business Cons Build up of residual unallocated P&L impact due to: FTP model not accurately reflecting the actual cost of funding which might be incurred, e.g. model charges Libor + 150bp as marginal cost, but actual incurred cost was Libor + 160bp – management overlay, where a deliberate “subsidy” is embedded in pricing to incentivise behaviours, e.g. provide 50bp extra credit for stable retail deposits to incentivise gathering

22 Funds Transfer Pricing – marginal costing
Yield (%) FTP model assumptions Asset Maturity Funding cost ≠ FTP model assumptions Funding tenor ≠ FTP model assumptions Maturity Time (t) Liability Yield (%) Yield (%) Maturity Asset Asset Time (t) Time (t) Liability Liability

23 PRMIA, London January 18th, 2012
Incorporating Liquidity Risk into Funds Transfer Pricing: Progress and Challenges Arno Kratky Group Treasury PRMIA, London January 18th, 2012

24 Agenda 1. The Regulatory Framework 2.
Interplay with Internal Liquidity Management Framework 3. Interplay with Fund Transfer Pricing 4. Implications for bank’s steering framework

25 The building blocks of Basel III
International standard: Basel III BCBS 164 / 189 BCBS 165 / 188 Capital Leverage Ratio Liquidity More and better capital shift focus to core Tier I capital excluding hybrid capital deducting deferred tax assets minority interests not considered no Tier III component Higher RWA introduce credit value adjustment account for correlation risk higher charge on trading books (stress VaR, incremental risk) increase counterparty risk charge (incentivise central counterparts) Higher capital ratios Counter-cyclical capital buffers Introduction of general leverage ratio backstop ratio, not risk-based nominator is balance sheet total plus (1) off-balance positions, (2) un-netted derivatives, (3) notional of written credit derivatives denominator given by regulatory Tier I capital broadly in line with IFRS accounting Liquidity Coverage Ratio LCR Buffer to be held against short term liquidity shortages Net Stable Funding Ratio effectively limits maturity transformation Monitoring tools (information only) contractual maturity mismatch concentration of funding unencumbered assets market-based data Public disclosure ICAAP: Internal Capital Adequacy Assessment Process 1.Identifying risks—List all material risks, interview staff in relevant departments, and assess the probability of risks occurring. 2.Assessing capital—How much capital would a risk require? 3.Forward capital planning—Assess how the capital calculated from the capital assessment might be altered by its business plan, i.e. perform stress and scenario analyses ILAAP: Internal Liquidity Adequacy Assessment Process MiFID: Markets in Financial Instruments Directive European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services EMIR: European Market Infrastructure Regulation Sets out to increase stability within OTC derivative markets. The Regulation introduces; a reporting obligation for OTC derivatives; a clearing obligation for eligible OTC derivatives; measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; common rules for central counterparties (CCPs) and for trade repositories; and rules on the establishment of interoperability between CCPs. Dodd Frank:Enhanced capital and other prudential standards applicable to systemically significant institutions, including leverage ratio requirements, liquidity standards, concentration limits, living wills, risk management standards, etc. -> consumer protection Volcker Rule: Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, prohibits banking entities that benefit from federal deposit insurance or have access to the discount window from the following activities: taking principal risk, prop trading, sponsoring private equity or hedge funds Glas Steagall (2nd G.-S. Act from 1933) The repeal of provisions of the Glass–Steagall Act by the Gramm–Leach–Bliley Act in 1999 effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits European implementation: CRD 4 BCBS 189: Strengthening the resilience of the banking sector; BCBS 188: International framework for liquidity risk measurement, standards and monitoring

26 Understanding the Regulator‘s Perspective of Basel III in a Nutshell
Cash markets are fragile and can disappear quickly Too much maturity transformation is unhealthy for the financial system Interconnected financial sectors can collapse like a house of cards There is good banking business (loans, deposits, service real economy) Biggest Lever LCR Narrow buffer Definition (govies, AA corp., covered bonds) Requirement: buffer assets must be ring-fenced and ‘under control of Treasury’ Market related eligibility criteria for level 2 assets (corp, covered bonds) such as existing deep repo market, max historical price volatility) Not eligible: Financials, equity, gold) No roll-over assumption for interbank funding Classification of deposits (operational & transactional) NFSR Treatment of Pfandbriefe: ‘cliff effect’ when they residual maturity < 1year (ASF 0% versus RSF 65%-100% for covered pool assets) Financial stocks and Financial bonds > 1year RSF 100% There is bad banking business (prop trading, derivatives, casino)

27 Liquidity Coverage Ratio / Liquidity Factors
Impact on different product types on identical balance sheets: assets assets 50 Government Bond Buffer 201) 50 Government Bond Buffer 50 50 ABS Bond (illiquid) 50 ABS Bond (illiquid) Buffer 0 Buffer 0 1) Only 20 units unencumbered since 30 funded via repo but liabilities liabilities 30 one week repo on ABS Bond Outflow 30 30 one week repo on Government Bond Outflow 0 LCR 83% LCR 1000% 30 O/N IB MM Outflow 30 30 3-months IB MM Outflow 0 40 3 months retail (stable) Outflow 0 40 O/N retail (stable) Outflow 2 No credit for short term secured funding of illiquid securities No credit for short term wholesale (interbank) funding

28 Net Stable Funding Ratio / Liquidity Factors
Demonstration of the impact on different products and trading strategies: Liabilities Liabilities 3 Mon. CP non-financial ASF 50% 9 Mon. Repo ASF 0% NSFR 250% NSFR 0% Assets Assets Corporate Bond AA RSF 20% Corporate Bond AA RSF 20% Assets Assets 9-months loan to Hedge Fund RSF 0% Listed Equity RSF 50% Assets Assets 6m Reverse Repo on 3y Corp. Bond A+ 3y Corp. Bond A+ funded via 6m Repo RSF 0% RSF 50% 2y Reverse Repo on Government Bond 5y Government Bond RSF 5% RSF 100% Assets Assets Unencumbered mortgage loan Basel II KSA 35% >1y (independent on maturity) Mortgage loan > 1y in covered pool funded by Covered Bond RSF 65% RSF 100% + Overcollateralisation for target rating

29 => 100m corporate deposits fund 25m term loans
Liquidity Implications Non-Operational Corporate Deposits Interplay between LCR and NSFR for non-operational corporate deposits and (short-term) corporate loans (1) Liabilities Assets 100m Non-op. Corporate Deposit Outflow (LCR) 75% => 75m 75m Level 1 Asset Buffer (LCR) 100% => 75m RSF (NSFR) 5% => 3,75m Remaining Cash 25m 25m Term Loan RSF (NSFR) 100% => 25m ASF (NSFR) 50% => 50m => 100m corporate deposits fund 25m term loans 75 50 LCR = = 100% NSFR = = 174% 75 28,75 Though there is headroom in the NSFR, the bank can not lend more (in cash) due to LCR restriction Buying Level 1 assets for the buffer itself generate an additional NSFR requirement

30 => 100m corporate deposits fund 46,25m term loans
Liquidity Implications Non-Operational Corporate Deposits Interplay between LCR and NSFR for non-operational corporate deposits and (short-term) corporate loans (2) Liabilities Assets 100m Non-op. Corporate Deposit Outflow (LCR) 75% => 75m 75m Level 1 Asset Buffer (LCR) 100% => 75m RSF (NSFR) 5% => 3,75m Remaining Cash 25m 46,25m Term Loan RSF (NSFR) 100% => 46,25m ASF (NSFR) 50% => 50m => 100m corporate deposits fund 46,25m term loans 21.25m short term wholesale > 30d 75 50 Outflow (LCR) 0% => 0m LCR = = 100% NSFR = = 100% 75 50 Extra cash 21.25m In order to use the NSFR ‘capacity’ the bank has to extend its balance sheet and borrow another 21m > 30days at extra costs, which also may compromise the bank’s liquidity ratio (and bank levy)

31 Inefficient Liquidity Transfer within the Banking System (1/3)
Bank A Bank B Cash 5 LCR Buffer (100%) = 5 Retail Loan RSF(85%) = 85 Equity 5 ASF(100%) 5 Stable Deposits ASF(90%) = 90 LCR outflow (5%) = 5 Cash 5 LCR Buffer (100%) = 5 Equity 5 ASF(100%) 5 1 Bank B borrowing funds via stable deposits (<1yr) and lending on term to retail customers (<1yr, but no inflows < 30days). Bank A just holds cash. Bank A Bank B LCR > 100% % NSFR > 100% %

32 Inefficient Liquidity Transfer within the Banking System (2/3)
Bank A Bank B Cash 0 LCR Buffer (100%) = 0 Retail Loan RSF(85%) = 85 Equity 5 ASF (100%) 5 Deposit from FI > 1yr ASF(100%) = 95 Cash 10 LCR Buffer (100%) = 10 Loan to FI > 1yr RSF(100%) = 95 Equity 5 ASF (100%) 5 Stable Deposits ASF(90%) = 90 LCR outflow (5%) = 5 2 Liquidity Transfer of 95 Bank B may transfer liquidity within the banking sector to Bank A via a long-term money market loan. Bank A invests the proceeds into the same portfolio of retail loans as before. RSF for Bank’s B loans increases from 85% to 100%, hence it can only lend 95 to Bank A (Bank B holds the balance in cash and hence increases its buffer). Using its cash balance of 5, Bank A can lend 100 to the private sector. Bank A Bank B LCR > 100% % NSFR % %

33 Inefficient Liquidity Transfer within the Banking System (3/3)
Bank A Bank B Cash 0 LCR Buffer (100%) = 0 Retail Loan RSF(85%) = 85 Equity 5 ASF (100%) 5 Deposit from FI < 1yr ASF(0%) = 0 Cash 10 LCR Buffer (100%) = 10 Loan to FI < 1yr 95 RSF(100%) = 0 Equity 5 ASF (100%) 5 Stable Deposits ASF(90%) = 90 LCR outflow (5%) = 5 3 When the remaining maturity of the liquidity transfer runs below one year, the efficiency of the liquidity allocation gets impaired. Though the external economic position from the banking sector to the private sector remains unchanged, Bank A would now be required to take additional term funding to comply with the NSFR (inflating its balance sheet) passing on additional costs to its clients or has to withdraw its loans to its customers. Bank A Bank B LCR > 100% % NSFR % >> 100%

34 Regulatory Authorities
Basel III – Commerzbank‘s Contribution to the Industry Dialogue Participation in Industry working groups Commerzbank plays an active role in liquidity working groups in various banking associations and bilateral discussions with aligned banks as well as with national regulators Banking Associations Aligned Banks Regulatory Authorities …and others…

35 Agenda 1. The Regulatory Framework 2.
Interplay with Internal Liquidity Management Framework 3. Interplay with Fund Transfer Pricing 4. Implications for bank’s steering framework

36 Increasing Complexity
Regulation is a moving target and subject to substantial changes Cumulative effects of regulation and associated (unintended) consequences on markets and banks business models are not well understood Regulatory (minimum) requirements will become more binding and need to be actively managed Ratios can not be seen in isolation but need to be managed simultaneously as ratios are interlinked. Measures which are positive for one ratio can turn out to have negative outcomes for another Banks are left with only little flexibility to manage cumulative effects effectively and to manage liquidity efficiently New regulations lead to alignment of liquidity management frameworks across banks which may result in more rather than less systemic risk

37 Main Differences between Regulatory and Industry Approach
Regulatory Approach *) Industry Approach **) Liquidity Coverage Ratio (LCR) Operational Liquidity Management Observation period 30 days 30 days point-in-time cumulative cash flow Narrow definition of liquid assets (no financials) Focus on secondary market liquidity No roll-over assumption for interbank funding Monoblock measure Only combined stress scenario Measure expressed as ratio Continuous observation period up to 12 months Representation of cash flow over whole period Wider definition of liquid assets Consideration of central bank eligibility Consideration of interbank funding potential Decomposition into legal cashflows, behavioural adjustments and liquidity capacity Allows for different scenario calculation Measure expressed as surplus Commerzbank SFR Commerzbank SFR Short term Net Stable Funding Ratio (NSFR) Structural Liquidity Management Commerzbank SFR Commerzbank SFR Severe Stress scenario Minimum ratio 100% permanent Assets and liabilities differentiated by type of customer and relationship All securities require stable funding (haircut) Loan business funded as per roll-over fiction Matched funded structures not considered Contingent liquidity require stable funding Covered bonds (self-issued) not considered as stable funding if remaining maturity < 1 year, covered pool still attracts RSF Less severe scenario w/o need for CM funding Target corridor instead of strict limits Assets and liabilities differentiated by product type and business owner Less liquid securities funded on haircut Core loan business requires stable funding Matched funded structures considered Contingent liquidity considered in stress portfolio Covered bonds (self-issued) considered (partly) as stable funding also if remaining maturity < 1 year. Long Term *) BCBS 188 as of December **) Observed methodology across firms

38  ()  Does Basel III overrule internal fund transfer pricing ?
Internal treatment more conservative than BIII Internal treatment consistent with BIII Internal treatment more aggressive than BIII () Is internal treatment still competitive ? Will change of internal treatment be challenged by supervisor ? Only little impact on running business The least need for adjustment Regulatory liquidity requirement need to be ‘subsidized’ by other products Business in danger of being unprofitable How to migrate to regulatory compliance ?

39     Does Basel III overrule Internal Funds Transfer Pricing ?
Compliance of external and internal requirements on aggregate level Basel III LCR operational Internal Steering Independent NSFR structural Less complex, but steering in case of breaches less efficient

40      Does Basel III overrule Internal Funds Transfer Pricing ?
Compliance of external and internal requirements on product level Assets Internal Basel III Assets Loans Loans Deposits Deposits Facilities Facilities . . . . . . others others External requirements have significant influence but steering mechanism is synchronized

41 Agenda 1. The Regulatory Framework 2.
Interplay with Internal Liquidity Management Framework 3. Interplay with Fund Transfer Pricing 4. Implications for bank’s steering framework

42 Integrated Steering Framework
Basel III will influence internal processes, but is neither a blue-print for an internal steering system nor for an internal (liquidity) funds transfer price system

43 Does Basel III overrule internal fund transfer pricing ?
Major banks employ a liquidity management system and fund transfer pricing methodology similar to Basel 3 but which differ with regard to parameters. How does a bank cobe with the difference? Working example (asset vs asset): Balance Sheet Volume RSF / internal requirement Ratio met at overall level but triggered by different products Loans -> ‚too expensive‘ Facilities -> ‚too cheap‘ 100m 50% 100% Corporate Loan 50m 100m 1bn Credit Facility 50m 100m 5% 0% 50m 50m Basel III NSFR Internal SF Basel III NSFR Internal Requirement Options to deal with: 1. Treat Basel III / FTP separately > two steering mechanism to follow 2. Only adobt induced regulatory ‚minimum‘ requirement -> conservative / expensive but aligned on product level 3. Adjust FTP towards regulatory framework > most consistent alignment, abandonment of own economic assessment, could be challenged by regulator

44 How to adopt Basel III to internal fund transfer pricing ?
Banks need to set steering signals to their trading units to manage restructuring of balance sheets. Timing is an important component. How fast should banks implement Basel 3 rules in FTP? Working example: Funding of a financial bond Currently, banks fund financials short term as they are tradable in financial markets. However, Basel 3 requires term funding latest by Banks have to adust their funding accordingly: FTP (in bps) FTP (in bps) 1 2 FTP (in bps) 3 Time 2011 2018 2011 2018 2011 2018 Options: 1. Keep current FTP and adjust as late as possible > inappropriate adjustment to Basel 3 2. Adjust FTP immediately for anticipated B 3 funding costs > triggering of unintended consequences? 3. Phase-in higher charges over time and signal to the trading desks -> proportional migration to reg. environment

45 Agenda 1. The Regulatory Framework 2.
Interplay with Internal Liquidity Management Framework 3. Interplay with Fund Transfer Pricing 4. Implications for bank’s steering framework

46 Where the Business is affected
Understand mechanics of Basel III and implications on business model Analyze portfolio mix and identify which products will have different treatment under regulatory rules compared to current internal treatment Consider potential pricing implications on anchor products (PK: retail loans & deposits, MSB: corporate loan book, C&M: trading portfolio, matched book, equity financing, ABF: secured financing) Understand need of customers and potential implication for end-users (to facilitate dialog with supervisors) Monitor competitors and their potential adjustments to product mix and/or pricing behavior Assess potential to pass on additional costs or anticipate structural changes to product mix Think about product innovation (but be aware of reputational limitation to exercise optionality)

47 Behavioral Adaption to NSFR
NSFR Isolines Potential Adjustments on Business Model compress net position of derivatives cut credit lines focus on advisory business revival of ‚originate and distribute‘ model > 100% = 100% ASF < 100% Improving NSFR 1 ASF NSFR NSFR = 2 RSF RSF To improve a given NSFR (indicated by in the chart above) an institution has two options: Adjust Asset Side reduce maturities shift to assets with lower RSF Adjust Liability Side increase maturities shift to liabilities with higher ASF The institution can increase the ASF by adjusting the liability side of ist balance sheet (e.g. liabilities with higher roll-over factors or longer duration) The institution can decrease the RSF by adjusting the asset side of ist balance sheet (e.g. assets with lower roll-over factors or shorter duration) impact on earnings impact on costs

48 Potential Steering Measures to Manage the LCR
Liquidity buffer LCR = (Cash outflow – Cash inflowcap 75%) ≤ 30d Levers to manage the ratio: Increase Liquidity buffer (-> higher costs) Decrease Cash outflow (-> lower returns) Increase Cash inflow (-> lower returns) Hold more Cash Increase duration of liabilites (e.g. short term deposits) Decrease duration of assets (e.g. short term loans) Sell illiquid assets and buy level 1/2 assets Increase stability of deposits (e.g. stable retail deposits and wholesale operational accounts) Decrease potencial liquidity drains (credit/ liquidity facilities)

49 Potential Steering Measures to Manage the NSFR
Available Stable Funding (ASF) NSFR = Required Stable Funding (RSF) In principle, the bank has two levers to manage the ratio: Increase ASF (-> higher costs) Decrease RSF (-> lower returns) Securitize existing business which is already term funded (and keep existing funding) Sell (non-level 1/2) assets Substitute liabilities with short duration (<1y) by liabilities with longer duration (>1yr) Substitute assets with longer duration (>1yr) by assets with shorter duration (<1y) Substitute liabilities with low ASF (wholesale) by liabilities with higher ASF (retail) Substitute assets with high RSF (illiquid bonds, term loans, retail loans) by assets with lower RSF (0%-risk weight govies, short term loans to financial institutions) Originate new liabilities (and invest cash into assets with lower RSF) New asset business does not improve the ratio

50 Regulatory Requirements – More than a Compulsory Excercise
Liquidity requirements such as LCR and NSFR, as currently stipulated by known drafts of Basel III and CRD IV, respectively, will have much more significance for liquidity management and steering due to their pronounced stress-orientated design, which is more demanding than current national regulatory liquidity requirements in place Forthcoming regulation will not allow for an escape clause, allowing institution to apply internal liquidity models for regulatory reporting purposes instead of standardised external rules. Hence, liquidity regulation becomes instantaneous binding once they become effective. At the same time, financial markets evidence tightening liquidity situation expressed in terms of volatility, increasing liquidity premia and restraint liquidity supply, both in volume and tenor. The combination of increasing regulatory (minimum-) requirements and increasing liquidity costs necessitate an efficient management and steering of liquidity in order to achieve an optimal level of compliance and to avoid extra-ordinary liquidity buffers and associated costs.

51 Group Treasury – Liquidity Analytics
Visitors’ address: Mainzer Landstrasse 153 60327 Frankfurt/Main Germany Postal address: 60261 Frankfurt/Main Phone: Group Treasury – Liquidity Analytics Contact: Arno Kratky Phone: +49 (0) Fax: +49 (0)

52 Disclaimer Investor Relations
This presentation contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about Commerzbank’s beliefs and expectations and the assumptions underlying them. These statements are based on plans, estimates and projections as they are currently available to the management of Commerzbank. Forward-looking statements therefore speak only as of the date they are made, and Commerzbank undertakes no obligation to update publicly any of them in light of new information or future events. By their very nature, forward-looking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, among others, the conditions in the financial markets in Germany, in Europe, in the United States and elsewhere from which Commerzbank derives a substantial portion of its revenues and in which it hold a substantial portion of its assets, the development of asset prices and market volatility, potential defaults of borrowers or trading counterparties, the implementation of its strategic initiatives and the reliability of its risk management policies. In addition, this presentation contains financial and other information which has been derived from publicly available information disclosed by persons other than Commerzbank (“external data”). In particular, external data has been derived from industry and customer-related data and other calculations taken or derived from industry reports published by third parties, market research reports and commercial publications. Commercial publications generally state that the information they contain has originated from sources assumed to be reliable, but that the accuracy and completeness of such information is not guaranteed and that the calculations contained therein are based on a series of assumptions. The external data has not been independently verified by Commerzbank. Therefore, Commerzbank cannot assume any responsibility for the accuracy of the external data taken or derived from public sources.

53 Thank you for joining us.
Q&A Thank you for joining us. Please join us for the networking reception at the concluding of the session.


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