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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.There are also a surprising number of things that create liquidity risk. It has forced the hand of the authorities. It’s why you need to assess how much liquidity you hold particularly under stressed conditions. This is then translated into a portfolio of high quality liquidity that meets the risk appetite of the Board. In this way your business should be able to survive liquidity shocks within a particular time horizon. You will also need to assess whether your funding profile is suitable for the business you undertake.

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 liquidity arbitrage? What’s the real definition of liquidity risk? Why do contractual cash flows need improvement? What are the main sources of liquidity risk? How does the regulatory process work? What’s liquid and what’s not? What's in the high quality buffer? Why is behaviour so important? What qualitative and quantitative measures are used? What's the liquidity coverage ratio about? How do structural measures like the net stable funding ratio aim to reduce risk? What’s stress testing all about? How severe should it be? How much does the liquidity 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?


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

Money market products

  • Loans and deposits
  • Yield curves and rates
  • Certificates of deposit
  • Commercial paper
  • Floating rate notes
  • Treasury bills
  • Central bank reserve accounts
  • Repurchase agreements

 Defining liquidity risk

  • The whole balance sheet
  • Contractual cash flows
  • What liquidity gap reporting tells you
  • The importance of granularity
  • A dealers tool
  • What’s missing

The liquidity regime

  • Internal Liquidity Adequacy Assessment Process (ILAAP)
  • Liquidity Supervisory Review & Evaluation Process (L-SREP)
  • Individual liquidity guidance (ILG)

Measures & responsibilities

  • Board responsibilities
  • Qualitative measures
  • Quantitative measures
  • Capital Requirement Directive IV (CRD IV)
  • Survival days
  • Buffer/High Quality Liquid Assets (HQLA)
  • Liquidity Coverage Ratio (LCR)
  • Turnover, sale and repo


The main drivers of liquidity risk

  • The run-off of retail funding
  • The reduction of secured and unsecured wholesale funding
  • The correlation and concentration of funding
  • Additional contingent off-balance sheet exposures
  • Funding tenors
  • The impact of a deterioration in the firm’s credit rating
  • Foreign exchange convertibility and access to foreign exchange markets
  • The ability to transfer liquidity across entities, sectors and countries
  • Estimates of future balance sheet growth
  • The impact on a firm’s reputation or franchise
  • Marketable asset risk
  • Non-marketable asset risk
  • Internalisation risk
  • Intraday liquidity risk

 Stress testing

  • Changes to stress testing
  • Severity
  • Scenarios

 Contingency funding plan

  • Early warning indicators
  • Limits
  • Reverse stress testing


  • Funding plans
  • Net Stable Funding ratio (NSFR)
  • Objective & calculation
  • Risk reporting

Funds Transfer Pricing

  • The regulatory view
  • The cost of money
  • Pricing liquidity risk into products

 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? 99% 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?

Free 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.

Payment RequiredLiquidity risk measures 83% relevant

25th March 2017

Banks are required to measure the inflows and outflows of cash over a designated period (30 days). This is undertaken for business as usual and stressed conditions. To make stress testing relevant the scenarios are designed by the individual bank. This analysis leads to banks holding High Quality Liquid Assets (HQLA). These are used to cover liquidity shortfalls in times of stress. The Liquidity Coverage Ratio (LCR) is the key measure. It compares the HQLA held with the net cash outflows under stressed condition and thereby indicates whether the bank is sufficiently liquid. By calculating the LCR banks undertake a detailed examination of their balance sheets. This involves evaluating all the factors that affect cash inflows and outflows. The process needs regular (at least annual) updating. Regulators review and evaluate how a bank has undertaken the assessment. Should the assessment be insufficiently detailed a regulatory “add-on” may result. The following explanation is high level and the rules and methods vary between different banks and different jurisdictions.

Free to ViewTreasury Consulting > Transfer pricing liquidity risk 80% 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 71% 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.