The document discusses liquidity risk, which can be defined as a bank's ability to meet its short-term obligations. It is measured over a specific time horizon and depends on factors like a bank's cash inflows and outflows. Liquidity risk is affected by both external market characteristics and internal factors specific to a bank's positions. Reporting on liquidity risk involves reconciling accounting and liquidity data, projecting contractual cash flows, and analyzing liquid assets, funding sources, and leading indicators of liquidity issues.

1. Liquidity Risk
Funding liquidity is point-in- time and a as a bank is either able to settle obligations or
not. Funding liquidity risk on the other hand can take infinitely many values depending
on the underlying position of the bank. As any other risk, it is forward looking and
measured 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 the
stock of money.
Structure of Risk
Market Value Asset Returns
External Environment
Liquidity
Internal Factors

2. Liquidity Risk
Liquidity Risk
Equity
Derivative
Market Risk
Cash
Equity
External factors impacting illiquidity is the result of market characteristics which is common to all
market participants and unaffected by individual actions. The market for liquid securities, such as
index equities or major currency pairs, is typically characterized by large trading volumes, small
spreads, 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 illiquid
and 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 market
participants, and the exposure of any one participant is affected by their own actions. It is mainly
driven by the size of the position: the larger the size, the greater the illiquidity. A good way to
understand the implications of the position size is to consider the relationship between the
liquidation price and the position size held.

3. Liquidity Risk
Enhanced Liquidity Reporting Requirements
Cash Flow Mismatches:
Daily Flows
Enhanced Mismatch Report
Contractual Cashflows - All maturities, All products, Liquid Assets
Liquid Assets:
Liquidity buffer - Market Value Country Analysis
Currency Analysis - Assets and Liabilities Split by currencies and % of balance sheet mix
Funding Sources:
Funding Concentration - Counterparty and Maturity by Name, Amount, Repo, UnSecured
Retail and Corporate Funding – Deposit Type by Retail, Corporate, SME
Leading Indicators:
Pricing Data - Wholesale Liabilities by Currency, Time, Spread, Volume
Systems and Controls – Compliance Checks

4. Liquidity Risk
Mismatch Reporting
Frequency
Reporting Aspects
Contractual Flows
Settlement Date
Segregated and Agency Flows
Principal vs All Flows
Valuation

5. Liquidity Risk
Reconciliation 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

6. Liquidity Risk
Liquidity Issues
Rates, FX, Credit, Equity, Commodity
Initial Margin
Intra Day Limits
Margin Calls
Uncertain Option Values
Collateral
Cost of Funds
Securitisation