Liquidity Management: A Funding Risk Handbook

210 Pages·2015·1.838 MB·English

by  Aldo Soprano

Liquidity
Management
ForothertitlesintheWileyFinanceseriespleasesee
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Liquidity
Management
A Funding Risk Handbook
ALDO SOPRANO
Thiseditionfirstpublished2015
©2015AldoSoprano
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LibraryofCongressCataloging-in-PublicationData
Soprano,Aldo.
Liquiditymanagement:afundingriskhandbook/AldoSoprano.
pagescm.–(Thewileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-1-118-41399-9(hardback)–ISBN978-1-118-41396-8(ebk)–
ISBN978-1-118-41398-2(ebk) 1. Bankliquidity. 2. Riskmanagement. I. Title.
HG1656.A3S662015
658.15′5–dc23
2015002039
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-1-118-41399-9(hbk) ISBN978-1-118-41396-8(ebk)
ISBN978-1-118-41398-2(ebk) ISBN978-1-119-08794-6(ebk)
CoverDesign:Wiley
CoverImage:©GettyImages/SteveRawlings
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PrintedinGreatBritainbyTJInternationalLtd,Padstow,Cornwall,UK
Contents
Acknowledgements xi
IntroductoryNote xiii
CHAPTER1
FundingandMarketLiquidity 1
1.1 Liquidity in theFinancial Markets 1
1.1.1 Definition offunding andliquidity risks 4
1.2 ManagingLiquidity Risk 9
1.2.1 Liquidity risk’s framework 9
1.2.2 ChiefRiskOfficer’srole 15
1.3 Regulatory Frameworks 15
1.3.1 Totalnetcashoutflows 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 changesofcustomers or
investors 28
1.3.6 Payment systems 29
1.3.7 Correspondent andcustody activities 30
1.3.8 Accounting treatment andliquidity 31
1.3.9 Diversificationoffundingsources 31
1.3.10 Ratingagencyapproachestointernal
methodologies 32
v
vi CONTENTS
1.3.11 Transparencytothe market 32
1.3.12 Contingency plans 33
CHAPTER2
Short-TermFunding 37
2.1 CashFlowLadder 37
2.1.1 Contractualcashflows 40
2.1.2 Rulesformapping flowsonthe maturity
ladder 42
2.1.3 Flowswithout contractual certainty 42
2.1.4 Unexpectedcashflows 43
2.1.5 Fundsavailable forrefinancing 44
2.1.6 Fundstransferability 44
2.1.7 Totalladdercalculation 44
2.2 Liquidity Coverage Ratio 45
2.2.1 Regulatory prescriptions 45
2.2.2 Liquidassetsavailable forrefinancing 46
2.2.3 Totalnetcashoutflowsintheupcoming
month 51
2.3 Liquidity RiskIndicators 58
2.3.1 Using indicators 59
2.3.2 Testingindicators 60
2.3.3 Government bond yieldcurves and
cross-spreads 61
2.3.4 Credit default swaplevels 61
2.3.5 Foreignexchangecross-values 61
2.3.6 Centralbankrefinancing 62
2.3.7 Crisis indicators 62
2.3.8 Riskaversion indexes 65
2.4 Intraday Liquidity Risk 66
2.4.1 Intraday liquidity management 67
2.4.2 Cooperative mechanism 71
Contents vii
2.4.3 Analysingthe possibleimpactofthestressed
scenario onintraday liquidity risk 73
2.4.4 Haircuts to pledges 75
2.4.5 Monitoring requirements 76
2.4.6 Structural andintraday liquidity needs 76
2.4.7 Payment systems’liquidity saving features 78
2.4.8 Intraday liquidity riskin thecaseofLehman
Brothers 79
2.4.9 Someintradayliquiditymonitoringindicators 80
2.4.10 Intraday liquidity stressscenarios 82
2.5 Funding Concentration 83
2.5.1 Significantcounterparties 85
2.5.2 Significant instruments/products 86
2.5.3 Significantcurrencies 86
2.5.4 Timebuckets 87
2.6 MeasuringAssetLiquidity 87
2.6.1 Standard liquidity ratio 89
2.6.2 Determining implied spread 90
CHAPTER3
Long-TermBalance 93
3.1 Structural Funding 94
3.1.1 Determining the availablefunding 95
3.1.2 Required stablefunding forassets 97
3.2 CustomerDeposit Modelling 99
3.2.1 Regulatory approachesondeposit stability 103
3.2.2 Depositor behaviours 104
3.2.3 Modelling assumptions andimpactson
funding costs 106
3.2.4 Dynamic regression models 109
3.3 StressTestingandScenarioAnalysis 111
3.3.1 Using stresstestingto improve banks’own
riskgovernance 112
viii CONTENTS
3.3.2 Liquidity stresstesting rationale 113
3.3.3 Improving controls 117
3.3.4 Stresstestingmethodology 117
3.3.5 Reversestresstesting 118
3.3.6 Scenarioanalysis 119
3.3.7 Internalcapitalandstresstesting 122
CHAPTER4
LiquidityValueAtRisk 123
4.1 MarketLiquidityEffects 123
4.1.1 Marketvolatility 124
4.2 MarketLiquidity ValueAtRisk 124
4.3 VaRLiquidation-Adjusted 133
4.3.1 Exogenousand endogenousliquidity risk in
theVaRmodel 137
4.3.2 Liquidity riskhorizons 138
4.4 CashFlowsAtRisk 140
CHAPTER5
ControlFramework 143
5.1 GovernancePrinciples 143
5.2 ControlProcesses 148
5.2.1 Functions inchargeofliquidity risk
management andcontrol 150
5.2.2 Riskcommittees 151
5.2.3 Coordinating liquidity management 152
5.2.4 Liquidity riskmonitoring function 153
5.2.5 Addressing documentation-related liquidity
risks 154
5.3 Monitoring Liquidity Exposure 155
5.3.1 Availableassetsforrefinancing 156
5.3.2 Funding concentration 157