What UAE Banks Should Be Asking Before Their First ILAAP-
Lessons Learned in Europe and the UK
As UAE banks begin preparing their first Internal Liquidity Adequacy Assessment Processes (ILAAPs), many Treasury professionals may understandably be asking the same question, where do we start?
For institutions across the UK and Europe, the ILAAP is now a familiar part of the regulatory landscape. Yet when enhanced expectations first emerged following the Global Financial Crisis, banks faced many of the same uncertainties that UAE institutions are experiencing today. The good news is that the UAE has an advantage, it does not have to learn these lessons from scratch.
A Brief History, why ILAAPs Exists?
The events of 2007–2008 demonstrated that liquidity failures can be just as damaging as capital inadequacy. Institutions that appeared well-capitalised discovered that confidence and funding can evaporate quickly.
In response, regulators shifted away from purely compliance-based liquidity monitoring towards a more holistic assessment of resilience. ILAAP’s evolved beyond regulatory reporting into a framework designed to answer a simple question:
Could this institution survive a severe but plausible liquidity stress whilst continuing to support its business model? Over time, the strongest ILAAPs became strategic documents rather than annual exercises.
What did UK and European Banks learn? Avoid treating ILAAP as a Treasury document, early ILAAP submissions often sat solely within Treasury. The most effective programmes evolved into organisation-wide exercises involving:
- Treasury
- Finance
- Risk
- Business Lines
- ALCO
- Senior Management
- The Board
Regulators increasingly expected evidence of ownership beyond the Treasury function.
Many institutions focused heavily on quantitative analysis but underestimated the importance of the story. An ILAAP should explain:
- The bank’s business model
- Its funding strategy
- Risk appetite
- Stress vulnerabilities
- Management actions
- Recovery capabilities
The document should demonstrate that management understands its liquidity profile and has challenged assumptions appropriately.
One of the greatest challenges European institutions faced was determining what constituted a genuinely “severe but plausible” scenario. Some frameworks were criticised for being overly theoretical. Others underestimated the speed at which confidence can deteriorate. Recent events in the region serve as a timely reminder that stress events rarely occur in isolation. Geopolitical tensions, market volatility and shifts in depositor confidence can emerge quickly and interact in unexpected ways. The challenge for UAE banks is not predicting the next crisis. It is ensuring they remain resilient regardless of what form that crisis takes.
As institutions develop their first ILAAPs, they may wish to consider scenarios incorporating combinations of:
- Institution-specific events;
- Market-wide disruption;
- Heightened geopolitical uncertainty;
- Reduced access to wholesale funding markets;
- Significant customer deposit outflows;
- Operational disruption affecting key infrastructure;
- Rapid deterioration in market sentiment;
- Foreign exchange market dislocation.
Importantly, these stresses should be linked to credible management actions.
ILAAPs- More Than An Annual Exercise
Perhaps the biggest lesson from Europe was that regulators increasingly assessed whether ILAAPs had become embedded within day-to-day decision-making. Leading institutions integrated ILAAP outputs into:
- Risk appetite setting
- Funding strategy
- Contingency planning
- Recovery planning
- Strategic planning
- ALCO discussions
The annual submission became the culmination of ongoing work rather than the starting point.
Treasury or Risk? The Ownership Debate
Perhaps one of the most interesting questions emerging as UAE banks prepare their first ILAAPs is a deceptively simple one: Who should own it?
The experience across the UK and Europe suggests there is no universally accepted answer. Some institutions placed ILAAP responsibility within Treasury, recognising that Treasury teams typically own many of the core activities underpinning the framework, including:
- Liquidity risk management;
- Funding strategy;
- Stress testing assumptions;
- Contingency funding planning;
- ALCO reporting and decision-making.
Others positioned ILAAP within Risk functions to reinforce independent oversight and ensure consistency with broader risk management frameworks. In practice, many of the strongest frameworks evolved into a partnership model.
Treasury often became responsible for:
- Producing the analysis;
- Developing scenarios and assumptions;
- Assessing management actions;
- Maintaining the liquidity framework.
Risk provided:
- Independent challenge;
- Review and validation;
- Governance oversight;
- Escalation to senior committees.
Ultimately, the question is less about where ILAAP sits organisationally and more about whether clear ownership, accountability and effective challenge exist. European experience suggests that banks which struggled often found themselves debating ownership rather than focusing on capability. Those that succeeded recognised that ILAAP sits at the intersection of Treasury, Risk and Governance. Perhaps for UAE institutions, the objective should not be to replicate another bank’s organisational structure, but to establish a model that reflects their own size, complexity and governance framework while ensuring robust challenge and senior management ownership.
Governance Is Critical
Boards do not need to understand every liquidity model. However, they do need sufficient understanding to provide meaningful challenge. Questions that should be actively debated at senior levels:
Would we survive this stress?
Are our assumptions realistic?
What actions would we take?
How quickly could we act?
Have we considered scenarios that are uncomfortable but plausible?
The Capability Challenge
Across Europe, the introduction of ILAAP accelerated demand for professionals capable of bridging Treasury, Risk and Governance. Liquidity specialists who could articulate complex stress-testing assumptions to Boards became increasingly valuable. The strongest programmes were supported by professionals with experience in:
- Liquidity Risk Management;
- Stress Testing;
- Behavioural Modelling;
- ALM;
- Funding and Balance Sheet Management;
- Recovery and Resolution Planning;
- Regulatory Reporting;
- Governance and Board Engagement.
For some UAE institutions, those capabilities already exist internally. For others, the introduction of ILAAP may highlight opportunities to strengthen teams, enhance governance structures or bring in specialist expertise.. The challenge is not simply designing the framework. It is ensuring the capability exists to sustain and evolve it over time.
Looking Ahead
ILAAP’s should not be viewed simply as another regulatory obligation. Done well, it provides senior management with a clearer understanding of how their institution would perform under stress and how liquidity considerations support strategic decision-making.
The UK and Europe have demonstrated that institutions which embed ILAAP into their culture often emerge with stronger governance, more resilient funding strategies and greater confidence in their ability to navigate uncertainty. As UAE banks embark on their own ILAAP journey, they have the benefit of hindsight.
Fifteen years of European and UK experience have shown that resilience is built long before it is tested. The opportunity now is to apply those lessons wisely.
