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Liquidity Risk Course

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Liquidity risk workshop

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Borrowing short and lending long is a traditional source of income for firms. But when depositors withdraw funds it can lead to bank failure. It has forced the hand of the authorities. It’s why running “liquidity lite” is no longer an option. Regulation has caught up and it’s going to be expensive. Furthermore understanding how it all fits together is a real challenge. Do you find it tricky? Are you in finance, operations, audit, risk, dealing or management?

Do you need to know more? This liquidity risk course gives you the opportunity to find answers to questions like: What is a liquidity arbitrage? What’s the real definition of liquidity risk? Why report contractual cash flows? What’s liquid and what’s not? Why is behaviour so important? What’s stress testing all about? How much does a buffer cost you? What’s the real reason for a CFP? How do weak controls and poor management increase your costs? Why transfer price? How will this reshape the market?

This liquidity risk course is properly structured, takes a day and there are case studies. It’s not complicated and you don’t have to be an expert. Interested?

Morning

 The liquidity arbitrage

  • How asset and liability mismatches make money.
  • How and why firms exploited this “liquidity arbitrage”
  • What it’s worth to your business

 Liquidity risk

  • Defining liquidity risk (this may surprise you)
  • Where your liquidity risk hides
  • What crystallises this risk?
  • What’s self sufficiency about?

 Managing cash flows

  • Contractual cash flows
  • What you would expect
  • What the gaps tell you
  • The importance of granularity
  • A dealers tool
  • What’s missing

 Liquid assets

  • What’s liquid and what’s not
  • Sale or repo
  • Unexpected risks from Gilts
  • The regulatory “view”  

How behaviour affects liquidity

  • The effect of confidence on sources of liquidity
  • Wholesale markets
  • Retail products
  • The purpose of a liquidity buffer

 Sources of funding

  • Is diversification appropriate?
  • What sources are available to you?
  • The hidden costs and risks of diversification

Afternoon

 Stress testing

  • Why it's in vogue
  • Scenarios you can apply
  • Unexpected calls on liquidity
  • How do stress test results determine your liquidity buffer?
  • What it can and can't tell you
  • The regulator’s view on stress testing

 Intraday liquidity

  • Another hidden risk
  • Managing intraday timing of payments & receipts to prevent liquidity shortfalls

 The Contingency Funding Plan (CFP)

  • What it is and what it should contain
  • What’s the purpose?
  • What's in it?
  • Stress test results to the CFP

Management responsibilities

  • Setting liquidity risk appetite
  • Identify the drivers of liquidity risk
  • Challenging the assumptions
  • The penalty for poor management

How much will this cost you?

  • Estimating the cost to your business
  • Why transfer pricing is important
  • What will this mean for product pricing

How will this affect the industry?

  • Provisional conclusions

 End of workshop & review

Related Documents

Payment RequiredMarket Guides > Liquidity risk explained 100% relevant

1st November 2009

A contractual cash flow report for a bank will show you that liabilities have shorter maturities than assets. That's because running liquidity risk generally makes money. But it has risks. Lack of confidence can lead to a real shortage of cash. That's why banks hold liquidity buffers. But measuring liquidity risk goes beyond what is contracted. It needs to assess the behaviour of markets and individuals. It's why stress testing is in vogue. Stress testing can't predict the future but it can give you an estimate for your liquidity buffer. It's likely to be a lot bigger than previously and it's going to cost your firm more, that's unless you can pass the cost on through transfer pricing.

Free to ViewRegulation > Does liquidity risk overshadow market risk? 93% relevant

23rd January 2010

In a world where regulators are focusing on liquidity and capital it's easy to overlook market risk. In many firms this means interest rate exposure. In the UK with Bank Rate at an all time low it's tempting to think that hedging fixed rate assets is just a waste of money. After all why pay 3.25% on a 5 year swap when 3 month Libor is only 51 basis points? Surely matching the interest basis on assets and liabilities ends up costing you 274 bps doesn't it?

NewFree to ViewLiquidity risk in a nutshell 85% relevant

10th June 2010

Depositor confidence in the banking system is crucial. It's why banks borrow short term and lend long. Damage this sentiment and the size of cash withdrawals will threaten individual banks and the system as a whole. Hence the new regulatory measures being taken to ensure banks hold sufficient liquid resources to meet just about all eventualities. This is a very brief explanation of the new liquidity regime.

Free to ViewTreasury Consulting > Transfer pricing liquidity risk 79% relevant

16th January 2010

A trader will tell you that there is a simple rule to pricing. The starting point is the cost of hedging.

Free to ViewRegulation > CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures June 2009 78% relevant

29th June 2009

The FSA presumes that every firm must be self sufficient for liquidity purposes unless a waiver is granted. The systems and controls requirement applies to all firms from Q4 2009 and will have no phased or transitional introduction. This is a summary of the CP.

Payment RequiredRegulation > Policy Statement 09/16 Stengthening liquidity standards October 2009 74% relevant

7th November 2009

Policy Statement 09/16 Strengthening liquidity standards refers to earlier consultation papers CP08/22, CP09/13 and CP09/14 and the comments received. In general whilst the FSA acknowledges many of the issues raised little has altered in the final policy. Firms will be expected to be self sufficient for liquidity purposes. Senior management is responsible for reviewing the level of liquidity, compliance and reporting to the Board. The FSA highlights that many firms have been unable to identify and report contractual cash flows on a regular basis. This will be unacceptable. Non compliance will be treated with regulatory sanction. How a firm is subject to Individual Liquidity Adequacy Standards (ILAS) depends on the size of the firm and the risks it presents. The ILAS framework comprises an Individual Liquidity Adequacy Assessment (ILAA), a Supervisory Liquidity Review Process (SLRP) and Individual Liquidity Guidance (ILG). Firms are obliged in the ILAA to undertake robust stress testing. The purpose of this is to show that the firm fully understands its liquidity risk. ILAS firms will need to report the stress test results in their ILAA. Liquidity management systems, controls and stress testing are all board responsibilities. The ILG is the amount of liquid resources the FSA expects a firm to hold. This will contain "guidance" on the amount of the liquid asset buffer and the firm's funding profile. As an incentive for firms to improve their systems and controls, the FSA will increase the amount of liquidity the firm must hold. Deposits at the central bank and tradable securities issued by the central bank will count towards the buffer. Holding currency denominated bonds should take into account potential problems in the FX market. For this reason a domestic bank with mainly sterling liabilities must hold its buffer in gilts. The FSA now require firms to price the cost of liquidity into products. This should mean that the cost of holding the liquidity buffer is passed on to those customers that create a stressed outflow requirement. The new regime will be phased in. The scope and application of the new rules will depend on the importance of the firm and its ability to create systemic risk.