Liquidity Management

Robust management of liquidity risk within the changing
regulatory framework

Liquidity Management applies current risk management
theory, techniques, and processes to liquidity risk control and
management to help organizations prepare in case of future economic
crisis and changing regulatory framework. Based on extensive
research conducted on banks' datasets, this book addresses the
practical challenges and critical issues that frequently go
unmentioned, and discusses the recent impact of sovereign crises on
banks' liquidity processes and approaches. Market practices and
regulatory stances are reviewed and compared to bank treasuries'
response to liquidity crunches, refinancing risks are explored in
the context of Basel 3, and alternative funding is analyzed in
terms of resilience and allocation. Coverage includes the recent
crisis, new regulations, and the techniques, processes, and
strategies banks use in managing liquidity risk.

The 2008 and 2010 crises brought liquidity risk out of the
shadows as even profitable and well-capitalized banks were swept
away with breathtaking speed. This book reviews modeling and
internal process design in the context of the structural change in
market conditions on banks' refinancing and control requirements,
helping readers rethink and re-design their organization's approach
to liquidity risk.

• Understand the new liquidity regulatory framework and the
  implications for banks

• Study the latest liquidity measurement models, with stress
  testing and scenario analysis

• Discover the effect of illiquid financing markets and possible
  lasting impacts

• Compare market liquidity and warning signals that detect
  further deterioration

With much of the world still reeling from history, it's
important that liquidity risk become a major focus going forward.
This practical guide provides valuable information, but also real,
actionable steps that can be taken today to forecast and mitigate
risks with an eye toward greater stability and security.
Liquidity Management is a thorough, comprehensive guide to a
more robust management of liquidity risk.

Auteur

ALDO SOPRANO is Head of Group Price Control at Unicredit and prior to that was in charge of Short Term Liquidity Risks and Operational Risk Management. He worked at Barclays Capital in London, served on the board of Pioneer Alternative Investments and Chaired the IIF working group on operational risks and is Board member of UniCredit Bank Ireland. He is the author of articles on risk management and presents at international conferences.

Résumé
Robust management of liquidity risk within the changing regulatory framework Liquidity Management applies current risk management theory, techniques, and processes to liquidity risk control and management to help organizations prepare in case of future economic crisis and changing regulatory framework. Based on extensive research conducted on banks' datasets, this book addresses the practical challenges and critical issues that frequently go unmentioned, and discusses the recent impact of sovereign crises on banks' liquidity processes and approaches. Market practices and regulatory stances are reviewed and compared to bank treasuries' response to liquidity crunches, refinancing risks are explored in the context of Basel 3, and alternative funding is analyzed in terms of resilience and allocation. Coverage includes the recent crisis, new regulations, and the techniques, processes, and strategies banks use in managing liquidity risk.

The 2008 and 2010 crises brought liquidity risk out of the shadows as even profitable and well-capitalized banks were swept away with breathtaking speed. This book reviews modeling and internal process design in the context of the structural change in market conditions on banks' refinancing and control requirements, helping readers rethink and re-design their organization's approach to liquidity risk.

• Understand the new liquidity regulatory framework and the implications for banks
• Study the latest liquidity measurement models, with stress testing and scenario analysis
• Discover the effect of illiquid financing markets and possible lasting impacts
• Compare market liquidity and warning signals that detect further deterioration
  With much of the world still reeling from history, it's important that liquidity risk become a major focus going forward. This practical guide provides valuable information, but also real, actionable steps that can be taken today to forecast and mitigate risks with an eye toward greater stability and security. Liquidity Management is a thorough, comprehensive guide to a more robust management of liquidity risk.

Contenu

Acknowledgements xi

Introductory Note xiii

Chapter 1 Funding and Market Liquidity 1

1.1 Liquidity in the Financial Markets 1

1.1.1 Definition of funding and liquidity risks 4

1.2 Managing Liquidity Risk 9

1.2.1 Liquidity risk's framework 9

1.2.2 Chief Risk Officer's role 15

1.3 Regulatory Frameworks 15

1.3.1 Total net cash outflows 21

1.3.2 Long-term funding requirements 22

1.3.3 Banks' funding 23

1.3.4 Funding through securitization 26

1.3.5 Behavioural changes of customers or investors 28

1.3.6 Payment systems 29

1.3.7 Correspondent and custody activities 30

1.3.8 Accounting treatment and liquidity 31

1.3.9 Diversification of funding sources 31

1.3.10 Rating agency approaches to internal methodologies 32

1.3.11 Transparency to the market 32

1.3.12 Contingency plans 33

Chapter 2 Short-Term Funding 37

2.1 Cash Flow Ladder 37

2.1.1 Contractual cash flows 40

2.1.2 Rules for mapping flows on the maturity ladder 42

2.1.3 Flows without contractual certainty 42

2.1.4 Unexpected cash flows 43

2.1.5 Funds available for refinancing 44

2.1.6 Funds transferability 44

2.1.7 Total ladder calculation 44

2.2 Liquidity Coverage Ratio 45

2.2.1 Regulatory prescriptions 45

2.2.2 Liquid assets available for refinancing 46

2.2.3 Total net cash outflows in the upcoming month 51

2.3 Liquidity Risk Indicators 58

2.3.1 Using indicators 59

2.3.2 Testing indicators 60

2.3.3 Government bond yield curves and cross-spreads 61

2.3.4 Credit default swap levels 61

2.3.5 Foreign exchange cross-values 61

2.3.6 Central bank refinancing 62

2.3.7 Crisis indicators 62

2.3.8 Risk aversion indexes 65

2.4 Intraday Liquidity Risk 66

2.4.1 Intraday liquidity management 67

2.4.2 Cooperative mechanism 71

2.4.3 Analysing the possible impact of the stressed scenario on intraday liquidity risk 73

2.4.4 Haircuts to pledges 75

2.4.5 Monitoring requirements 76

2.4.6 Structural and intraday liquidity needs 76

2.4.7 Payment systems' liquidity saving features 78

2.4.8 Intraday liquidity risk in the case of Lehman Brothers 79

2.4.9 Some intraday liquidity monitoring indicators 80

2.4.10 Intraday liquidity stress scenarios 82

2.5 Funding Concentration 83

2.5.1 Significant counterparties 85

2.5.2 Significant instruments/products 86

2.5.3 Significant currencies 86

2.5.4 Time buckets 87

2.6 Measuring Asset Liquidity 87

2.6.1 Standard liquidity ratio 89

2.6.2 Determining implied spread 90

Chapter 3 Long-Term Balance 93

3.1 Structural Funding 94

3.1.1 Determining the available funding 95

3.1.2 Required stable funding for assets 97

3.2 Customer Deposit Modelling 99

3.2.1 Regulatory approaches on deposit stability 103

3.2.2 Depositor behaviours 104

3.2.3 Modelling assumptions and impacts on funding costs 106

3.2.4 Dynamic regression models 109

3.3 Stress Testing and Scenario Analysis 111

3.3.1 Using stress testing to improve banks' own risk governance 112

3.3.2 Liquidity stress testing rationale 113

3.3.3 Improvi…