liquidity risk management

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Permalink Reply by Sachidanand (Sacha) Singh on March 10, 2010 at 10:54pm

Liquidity risk is inability to meet maturing liability. A bank can meet a maturing liability only if it has cash to do so, other assets will not do. It is managed preparing a structured liquidity sheet - projecting which liabilities are maturing in different time buckets - one week to ... and which assets are expecetd to provide cash for meeting those liabilities. The gap must be managed as per the bank's policy.

It can then be tested for stress - suppose 5% more liabilities mature (some time deposits are presented for pre-mature payment), suppose assets realise 10% less than expectations (some loans have gone bad)

When we have a large number of assets and liabilities we can use different statistics to measure likley liquidity scenario

VaR type analysis is almost always used.

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Permalink Reply by Sachidanand (Sacha) Singh on March 11, 2010 at 11:46am

I had not read the last line. Hunt for RBI Circulars on risk management. It covers LRM in full details

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Permalink Reply by David Smart on March 11, 2010 at 3:45pm

Hi Kavitha,

When you have a moment, you can go ahead and review some of the Basel papers with regard to liquidity risk management (here is the link - http://www.bis.org/list/bcbs/tid_64/index.htm)

My reason for suggesting that is that Basel is in the process of revising the current framework for identifying and managing liquidity risk. And since most supervisory bodies use their framework, it could help you know what their next moves will be.

As for your query, the approaches that I have used so far are duration (mismatch) analysis and the present value per basis point.

Regards

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