Creating Competitive Advantage in Financial Services Will Require Proactive and Aggressive Liquidity Risk Management, Says Diamond Management & Technology Consultants

While U.K. banks fret that the Financial Services Authority’s latest regulatory proposal could harm overall competitiveness, forward-thinking financial institutions can turn regulatory compliance into an opportunity to build a competitive advantage, according to Diamond Management & Technology Consultants Limited (NASDAQ: DTPI).

Across the globe, many financial services firms will simply maintain their footing by implementing the bare minimum FSA, U.S. Federal Reserve, and Securities and Exchange Commission liquidity risk management requirements. But as Diamond says in its new report, "Gaining a Competitive Advantage Through Advanced Liquidity Risk Management,” these firms will likely struggle again during future financial disorder, and those that have been proactive will gain an edge and benefit from wider access to cheaper funding pools, increases in credit ratings, and reputational rewards.

"No financial services firm wants to relive the challenges of Basel II compliance, but a look back at the lessons learned can be instructive in facing this latest situation,” says Stephen Warrington, a Diamond partner who serves as Managing Director of the firm’s U.K. practice. "When we helped install Basel II controls at a wide range of global financial institutions, we typically found three key elements missing.

"First, the firm’s information platform did not allow for cross-silo risk assessment. Second, no single individual had firm-wide responsibility for risk management. Third, organisations lacked the multi-disciplinary skills to perform the required technology and process work.”

However, firms that saw Basel II as an opportunity to comprehensively strengthen risk management spent roughly the same on compliance—but had a much more robust risk management and regulatory response mechanism when they were done, according to Diamond’s report.

To obtain a copy of the complete report, send an email to UKliquidityrisk@diamondconsultants.com.

Grasping the Opportunity

Diamond says firms that act early and aggressively to gain a competitive advantage through advanced liquidity risk management will benefit substantially through larger and cheaper pools of external liquidity, increased credit ratings, and reputational stature. Each of these factors will have a positive effect on the long-term profitability of the firm.

"A consistent liquidity risk management effort requires focusing on four key operational and technology areas: accountability and control, insightful stress testing, robust contingency plans, and operational fitness,” says Amit Desai, author of the report and a Manager in Diamond’s U.K. practice. "Each initiative offers benefits in its own right, but a comprehensive approach will yield the greatest competitive advantage.”

That effort can be done cost-effectively and can contribute to both more stable and higher earnings, even when accounting for the time and investment that will be required. Diamond says that over time, firms that take this proactive responsibility will see their credit ratings rise, putting downward pressure on their overall cost of capital and increasing their profitability.

The current liquidity crisis should provide firms with the organisational motivation to avoid mistakes of the past by creating the right information platform, organisational responsibilities, and firm-wide capabilities, according to the report. In this situation, firms can invest money they have to spend anyway, but in a way that creates more lasting value.

The complexity of modern products and financial systems suggests that similar crises are inevitable and preparation is essential, and not simply an option. When operational processes around liquidity management do exist, a more fundamental problem is often seen—information and data to assess liquidity risk is limited or simply unavailable at senior levels. As such, the use of outdated or ineffective technologies is not only a hindrance to risk mitigation, it can often amplify the threats themselves.

Says Warrington: "The higher credit ratings, lower cost of capital, and higher, more stable earnings will help a firm attract clients and investors alike. We’re seeing the flight to safety and the best-in-class organisation becomes extremely attractive. Investors and analysts will recognise this and, as competitors struggle, well-managed firm will stand to thrive.”

About Diamond

Diamond (NASDAQ: DTPI) is a management and technology consulting firm with offices in Chicago, Hartford, London, Mumbai, New York, and Washington, D.C. Recognising that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organisational boundaries to develop new strategies, improve operations, and deliver results. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit www.diamondconsultants.com.

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