Supervisory expectations have shifted decisively toward real-time execution under stress, forcing banks to integrate capital and liquidity management, strengthen data credibility, and prepare actionable contingency plans. Christopher Brown explains why op
The era of static ratio compliance is
fading fast as regulators demand that banks prove they can execute under stress
in real time, reshaping how institutions approach capital and liquidity
management.
According to Christopher Brown,
Capital Adequacy & Policy Lead at RBC Capital Markets, supervisory expectations have evolved
significantly in the wake of market volatility since 2023, placing greater
emphasis on operational capability rather than headline metrics.
“Post 2023, the shift is from having
ratios to proving you can execute,” he said, highlighting a fundamental change
in how resilience is assessed.
This transformation requires banks to
treat capital and liquidity not as compliance exercises, but as core operating
disciplines.
Brown emphasized that firms must be
able to produce reliable, explainable data quickly, supported by robust
governance and tested stress playbooks. “If you can’t explain your numbers
quickly and repeatably, you won’t be credible when markets move,” he said.
A central challenge lies in breaking
down long-standing silos between risk functions. Historically, capital and
liquidity have been managed separately, often resulting in fragmented processes
and limited visibility of second-order risks.
Brown noted that firms are now
focusing on integrating these frameworks, aligning stress scenarios across
capital, liquidity, and interest rate risk to eliminate blind spots.
“Liquidity and capital were viewed as
two different stripes of financial risk,” he said. “That created blind spots to
second-order downside risks.”
This shift toward integration is also
driving improvements in data and operational readiness.
Banks are increasingly prioritizing
real-time cash visibility and collateral readiness, ensuring they understand
what resources are available during periods of stress.
Brown stressed that liquidity
decisions must be closely linked to capital outcomes, warning that actions
taken to address one area can have unintended consequences for the other.
Looking ahead, regulatory uncertainty
around potential recalibration of key liquidity metrics such as the Liquidity
Coverage Ratio and Net Stable Funding Ratio is adding further complexity.
Brown advised institutions to operate
under current rules while preparing for possible changes through scenario
analysis and pre-agreed response strategies.
