In this article we speak with a Head of Liquidity Risk Management for a global tier one bank. We are keen to present a warts and all experience to give a more honest review of moving between Treasury and Treasury Risk.
We’re presenting this article anonymously in order to protect the relationships the interviewee has, both now and those established during the tumultuous years when banks established their Treasury Risk Oversight teams. Our guest has two decades of experience in multiple Treasury roles for global banks before moving into Treasury Risk Oversight functions. Here, he tells us about the challenges along the way and explains what skill sets are necessary for candidates who are considering crossing to the “second line of defence”.
Tell us about your career and why you moved into Liquidity Risk Management
Most of my career has been spent in Treasury, beginning at a Tier One US Investment Bank. Those years were spent focusing on Capital, then I moved into this new area called Liquidity after the banking crisis in 2008.
In about 2010, the concept of the three lines of defence came into play. The first line being Treasury and the business, the second being an independent oversight function or Risk, and the third, who oversaw all of us, being Audit.
A new function was formed within the bank in 2010 to provide independent oversight to Treasury. Historically, Treasury (my team) had thought of itself as a risk function, so when we had the second line challenging us on our risk management decisions, it was an adjustment, with some people very resistant.
There was a Treasury perception at the time, founded or unfounded that the skill set and experience of those in the second line was not nearly as rounded as those in the first line. That did cause a certain amount of political friction around roles and responsibilities. Treasury
had until that point been the all-encompassing source of managing the balance sheet for many years, suddenly, a lot of what had always been within the remit of Treasury was moving to Risk/second line. Who sets the policy? Who’s in charge of committees? Who sets the stress testing? Who sets the methodologies? Much of this is still to be resolved in several organisations around the world.
had until that point been the all-encompassing source of managing the balance sheet for many years, suddenly, a lot of what had always been within the remit of Treasury was moving to Risk/second line. Who sets the policy? Who’s in charge of committees? Who sets the stress testing? Who sets the methodologies? Much of this is still to be resolved in several organisations around the world.
When I was approached by a European Bank with a smaller footprint to form a new second line function, I had mixed emotions because my own experience had been dubious at best. Ultimately, I made the move to take up the role. I thought that as someone who’s been in Treasury for many years as a second line person, I would bring enough experience and empathy to work collaboratively with the Treasury side, even in that independent challenge role.
What motivated me was the chance to build from scratch a model of how I felt a second line should best interact with the first line.
When you joined the new Team/Bank, were the responsibilities of Liquidity Risk defined?
Part of my role was to define the roles and responsibilities of the newly forming second line, the bank was instructed by the lead regulator that a specialist Liquidity risk profile was required. To that point they had a sole contributor who covered Market Risk, IRRBB, Capital and Liquidity Risk. Thankfully the Treasury team understood that this change was regulatory driven and were accepting of that. My immediate bosses at the time were determined to make the adjustment work, they were very effective in manging their relationship with Treasury and I realised quite early on that I would need to do the same. There was one person in the bank’s Treasury who had been the go-to for all liquidity issues for many years. I managed to build a good rapport with him. He recalls that I told him at our first meeting that ‘I want us to learn together, I’m not here to catch you out and while I may not always say things that you want to hear, I have the bank’s interest at heart.’
We had to agree to some changes and ultimately, we moved the liquidity policy, stress testing framework and liquidity methodologies to my team and through this process we learned to trust one another. We regularly faced the regulator together; they were of course eager to understand how our new dynamic was working and so our relationship had to present a united front.
Naturally, there were people on the first line who tried to guard their responsibilities, but by the time I left some years later, everyone accepted the change. I moved back to a larger global organisation and to take up a new challenge in Liquidity Risk Oversight.
Having established a risk oversight function in a smaller organisation, how was it slotting back into a global bank risk role?
The roles and responsibilities at the bank were well understood by both sides when I joined, which was refreshing after going through the tug of war in both my previous roles in those early days. Second line here oversees setting out the framework, validating or challenging modelling assumptions, and setting up policies, governance, limits, etc. First line oversees planning and forecasting, Treasury balance sheet steering, Treasury execution, and developing treasury stress-testing methodologies. The relationship between first and second lines can still have its moments but overall, it has moved on to the next chapter. There are still inevitable frictions, for example challenging model assumptions that can lead to challenging buffering assumptions too and so on. My time in Treasury certainly gives me a realistic perspective of how difficult it is to manage liquidity. Unlike market risk, which is very precise, there is much more human psychology at play with liquidity, and Treasury often need to manifest this into a stress test, it can’t always be perfect.
In the second line we must consider the implications to our stakeholders, both audit and the regulators are interested to see that we’re providing sufficient and significant challenge. While I can understand the direction liquidity managers are often going in, we in Risk need to challenge on things that can sometimes be considered vague by Treasury because we need to provide reports and findings from our side.
How important are stakeholder management skills to be effective in a Liquidity Risk Oversight role?
Personally, when hiring I look for people with specific skill sets. It is important candidates understand liquidity risk and can hit the ground running. What I value as much is the ability to credibly challenge in robust and technical liquidity conversations and the ability to manage relationships with our key stakeholders and counterparts. Our role in Liquidity Risk Oversight is almost to play a good cop bad cop, this is important to maintain a level of trust.
How has your perspective on liquidity management changed since moving into risk?
It’s reinforced my view that it’s very important, and my understanding of the key liquidity levers is the same. But I have a slightly more disciplined and structured approach.
When you’re in the first line, you don’t have the luxury of perfection. But it is very important to have those parameters and governance policies in place, otherwise when you come into a stress scenario, you’ll create more chaos on top of the chaos that you’re already trying to manage.
What advice would you give to those considering moving from the first to the second line?
In the second line, you must take a view that you are challenging and you’re not in the trenches. Sometimes it’s easy to be an armchair critic, in liquidity risk oversight it’s not. Building the liquidity buffer, handling the day-to-day transactions is all happening in treasury. On the second line, you are ensuring that the framework that facilitates it, is in place. It’s good to have that opportunity to sit back and think more holistically, but if you’re naturally used to being a doer, it’s an adjustment– you’re using a different side of your brain.
There can be a perception that on the second line we’re in an academically pure setting, whereas in the treasury trenches, you often have less than adequate systems and you must make decisions very quickly. I say we are all striving for the same thing even though we may have a different periscope.
What skills could someone from a treasury background offer a liquidity risk position?
The sky’s the limit! In treasury, you get that deep understanding of the overall balance sheet: the funding strategies, optimisation, the capital side, the liquidity side. You can be very effective in a risk role with this experience because you’ve been there, and you understand the mentality of a liquidity manager. It’s helpful if you’ve experienced a stress event. This is a period when all of us learn new things and begin to appreciate how a treasury function will react and under certain parameters, horizons and timelines and allows us to better manage this in future events.
We see many applicants who’ve come from a markets role rather than a pure risk background. Do you think they can make strong Liquidity Risk managers?
Absolutely. Those plucked out of the business side, whether it be investment banking or trading, rise in treasury. The immediacy with the markets is very necessary, and that ability to steer things is invaluable.
Many people feel that a bank is effectively one big model, so are people with coding languages in demand for liquidity risk-based positions?
There is certainly a push to underpin actions and buffers with models, which opens a whole new set of governance rules. The first line would generally be the developer, and the second line will be the validator. As models become more sophisticated, the demand to understand and write programming languages such as SQL/Python/C# is growing. One of the hardest things to find is someone who’s got a quantitative mindset coupled with strong communication skills to handle stakeholder management.
Are treasury and risk roles more interchangeable these days?
Definitely. We’ve hired several people from the treasury into liquidity risk management teams globally. They’re strong contributors, because they not only understand the technical side but also the relationship side, which is so important. We recently hired an individual from treasury, it’s a new perspective and their strength is that they already understand the mindsets of the liquidity managers having been there themselves. They already have relationships with the Treasury team too, they can be effective in those difficult conversations, there’s a level of trust as a baseline.
