Liquidity RiskFunding liquidity is point-in- time and a as a bank is either able to settle obligations ornot. Funding liquidity risk on the other hand can take infinitely many values dependingon the underlying position of the bank. As any other risk, it is forward looking andmeasured over a specific horizon. Funding liquidity is best understood as a flow concept,i.e. a bank is liquid as long as outflows of money are less or equal to inflows and thestock of money. Structure of Risk Market Value Asset Returns External Environment Liquidity Internal Factors
Liquidity Risk Liquidity Risk Equity Derivative Market Risk Cash EquityExternal factors impacting illiquidity is the result of market characteristics which is common to allmarket participants and unaffected by individual actions. The market for liquid securities, such asindex equities or major currency pairs, is typically characterized by large trading volumes, smallspreads, on-demand quotes. Liquidity cost may be negligible for such positions. In contrast,markets in small capitalised stocks or emerging currencies or thinly traded junk bonds are illiquidand are characterized by high volatilities of spread, quotes and trading volumes.Internal factors affecting illiquidity is specific to a position in the market, varies across marketparticipants, and the exposure of any one participant is affected by their own actions. It is mainlydriven by the size of the position: the larger the size, the greater the illiquidity. A good way tounderstand the implications of the position size is to consider the relationship between theliquidation price and the position size held.
Liquidity RiskEnhanced Liquidity Reporting RequirementsCash Flow Mismatches:Daily FlowsEnhanced Mismatch ReportContractual Cashflows - All maturities, All products, Liquid AssetsLiquid Assets:Liquidity buffer - Market Value Country AnalysisCurrency Analysis - Assets and Liabilities Split by currencies and % of balance sheet mixFunding Sources:Funding Concentration - Counterparty and Maturity by Name, Amount, Repo, UnSecuredRetail and Corporate Funding – Deposit Type by Retail, Corporate, SMELeading Indicators:Pricing Data - Wholesale Liabilities by Currency, Time, Spread, VolumeSystems and Controls – Compliance Checks
Liquidity Risk Mismatch Reporting FrequencyReporting Aspects Contractual Flows Settlement Date Segregated and Agency Flows Principal vs All Flows Valuation
Liquidity RiskReconciliation Between Accounting and Liquidity Data Accounting Data Liquidity Data Reconcile to GL Reconcile to Finance & Risk Data Asset /Liability match treatment Assets latest date, Liabilities - Double entry earliest date Economic substance - fair Contractual cash flows/ MTM (not value and historical cost behavioural) Backward looking Forward looking projection of flows On Balance Sheet (Largely) Includes Off Balance Sheet
Liquidity Risk Liquidity IssuesRates, FX, Credit, Equity, Commodity Initial Margin Intra Day Limits Margin Calls Uncertain Option Values Collateral Cost of Funds Securitisation