DIFC economics workshop underlines critical importance of managing liquidity and risk to survive current global crisis

The event was the fourth in the ongoing DIFC Economics Workshop Series.

Speakers included Dr. Nasser Saidi, Chief Economist of DIFC Authority; Bryan Stirewalt, Director of Supervision at Dubai Financial Services Authority (DFSA); Dr. Fabio Scacciavillani, Director of Macroeconomics and Statistics at DIFC Authority; Leonard Matz, International Director of Liquidity and Interest Rate Risk Consulting at SunGard; and Dr. Sunil Kumar, Senior GARP Member and Head of Risk Management ME at FRSGlobal.

They pointed out that the global financial market turmoil has put a premium on liquidity. To ensure sound recovery and resumed growth and functioning credit and financial markets, firms and institutions need to put in place sound liquidity and risk management practices.

Dr. Saidi, in his address, referred to the difficult times the world is undergoing. "The times that we live in have been described as the 'Great Recession'. Fortunately, 'green bamboo shoots' are beginning to appear and the global downturn, though nowhere near getting over as yet, will be of shorter duration than the Great Depression of the 1930s.

"There are two key courses of action that challenge us - how to manage liquidity and risk in the current climate of dysfunctional markets, and reforms of the legal, regulatory and market infrastructure to support a sustained recovery and renew confidence in markets, their regulators and key players. The current financial architecture and its components requires re-design to ensure sound and efficient markets," Dr. Saidi said.

While underlining its importance, he pointed out that the understanding of liquidity and risk management in the Arab World is comparatively low. "Understanding risk and liquidity management gives a company a strong advantage in surviving a downturn and emerging well-positioned for growth when the economic climate turns around. On the other hand, ignoring the fundamentals of cash flow and market related risks could be fatal for a firm, especially in a market that is squeezed and credit unavailable," Dr. Saidi explained.

"But," he added, "fundamentally the primary responsibility rests on central banks and monetary authorities to address and mitigate the systemic risk from illiquidity, contagion, financial linkages and network effects. Liquidity risk management is a micro concern at the level of companies and a macro concern at the level of the regulators and central banks who need to ensure sound and functional markets. We need to put in place an overall liquidity management framework. This will be a challenge for our region that requires developing money and debt markets."

DFSA's Stirewalt pointed out that the global financial crisis has highlighted the need for adequate liquidity management at all firms, financial and non-financial. "Many of the companies that have experienced problems in recent times have suffered from a poor framework for managing and planning liquidity needs. Managing liquidity risk is critical component of overall risk management, as a liquidity shortfall in one institution can have system-wide consequences, even across borders."

"Globalisation has had many benefits for the worldwide economy, but it also brings a higher level of complexity to risk management. These transformational times require responsive regulation, governance and supervision. For our part, the DFSA will continue to look at the inter-relationship between liquidity regulation, capital adequacy and other prudential measures, so as to ensure a truly effective and efficient supervision regime in the DIFC that supports stability and enables prudent growth," added the DFSA Director for Supervision.

SunGard's Matz, who has authored numerous international financial publications on Liquidity Risk Management, emphasized the importance of early indicators to notice potential adverse developments quickly and to respond promptly in the current changing market conditions.

The SunGard International Director shared from his 25 years background as liquidity management expert on how to use key risk indicators, stress tests and contingency planning to address present market conditions and future regulators requirements.

Dr. Sunil of FRSGlobal and GARP pointed out that, "Liquidity Risk Management should move into the realms of Core Risk Management as market dynamics have changed drastically. Liquidity risk is no more a simple function of managing daily cash flows. With increasing reliance on market-based funding, risk has acquired new dimensions. The increasing interaction between liquidity risk and other risks is posing serious challenges."

According to him, institutions need to move from simple ratios to looking at liquidity risk as a process. "Ratios are a post-event analysis tool with limited capability to predict future. Stress testing, scenarios generation and simulations linked to strategy and policies of the institutions are essential for managing liquidity. Treating liquidity risk as a silo is a gross underestimation. Unified financial analysis with integrated risk management practices is the right approach," Dr. Sunil added.

The Liquidity and Risk Management workshop was organised by the DIFC Authority in association with the Global Association of Risk Professionals (GARP) and SunGuard. The workshop was held to review and offer new strategies, insights and practices to strengthen the management of liquidity and risk, with especial emphasis on the current financial strains the world is going through.

The workshop was held as part of DIFC Authority's continuing efforts to promote, encourage and support best-of-breed good practices and world-class work ethics. Workshops such as the one on Liquidity and Risk Management create an interaction with global experts and helps in transfer of expertise to the region.