Liquidity Management E-Book

Aldo Soprano

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch

Seitenzahl: 275

Veröffentlichungsjahr: 2015

Beschreibung

Robust management of liquidity risk within the changing regulatory framework

Liquidity Management applies current risk management theory, techniques, and processes to liquidity risk control and management to help organizations prepare in case of future economic crisis and changing regulatory framework. Based on extensive research conducted on banks' datasets, this book addresses the practical challenges and critical issues that frequently go unmentioned, and discusses the recent impact of sovereign crises on banks' liquidity processes and approaches. Market practices and regulatory stances are reviewed and compared to bank treasuries' response to liquidity crunches, refinancing risks are explored in the context of Basel 3, and alternative funding is analyzed in terms of resilience and allocation. Coverage includes the recent crisis, new regulations, and the techniques, processes, and strategies banks use in managing liquidity risk.

The 2008 and 2010 crises brought liquidity risk out of the shadows as even profitable and well-capitalized banks were swept away with breathtaking speed. This book reviews modeling and internal process design in the context of the structural change in market conditions on banks' refinancing and control requirements, helping readers rethink and re-design their organization's approach to liquidity risk.

• Understand the new liquidity regulatory framework and the implications for banks
• Study the latest liquidity measurement models, with stress testing and scenario analysis
• Discover the effect of illiquid financing markets and possible lasting impacts
• Compare market liquidity and warning signals that detect further deterioration

With much of the world still reeling from history, it's important that liquidity risk become a major focus going forward. This practical guide provides valuable information, but also real, actionable steps that can be taken today to forecast and mitigate risks with an eye toward greater stability and security. Liquidity Management is a thorough, comprehensive guide to a more robust management of liquidity risk.

Leseprobe

For other titles in the Wiley Finance series please see www.wiley.com/finance

Liquidity Management

A Funding Risk Handbook

ALDO SOPRANO

This edition first published 2015 © 2015 Aldo Soprano

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Library of Congress Cataloging-in-Publication Data

Soprano, Aldo.    Liquidity management : a funding risk handbook / Aldo Soprano.           pages cm. – (The wiley finance series)       Includes bibliographical references and index.    ISBN 978-1-118-41399-9 (hardback) – ISBN 978-1-118-41396-8 (ebk) – ISBN 978-1-118-41398-2 (ebk)   1. Bank liquidity.   2. Risk management.   I. Title.    HG1656.A3S66 2015    658.15′5–dc23

2015002039

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-41399-9 (hbk)   ISBN 978-1-118-41396-8 (ebk)

ISBN 978-1-118-41398-2 (ebk)   ISBN 978-1-119-08794-6 (ebk)

Cover Design: Wiley Cover Image: ©Getty Images/Steve Rawlings

Contents

Acknowledgements

Introductory Note

CHAPTER 1 Funding and Market Liquidity

1.1 Liquidity in the Financial Markets

1.2 Managing Liquidity Risk

1.3 Regulatory Frameworks

CHAPTER 2 Short-Term Funding

2.1 Cash Flow Ladder

2.2 Liquidity Coverage Ratio

2.3 Liquidity Risk Indicators

2.4 Intraday Liquidity Risk

2.5 Funding Concentration

2.6 Measuring Asset Liquidity

Note

CHAPTER 3 Long-Term Balance

3.1 Structural Funding

3.2 Customer Deposit Modelling

3.3 Stress Testing and Scenario Analysis

CHAPTER 4 Liquidity Value At Risk

4.1 Market Liquidity Effects

4.2 Market Liquidity Value At Risk

4.3 Var Liquidation-Adjusted

4.4 Cash Flows At Risk

CHAPTER 5 Control Framework

5.1 Governance Principles

5.2 Control Processes

5.3 Monitoring Liquidity Exposure

5.4 Setting Liquidity Risk Limits

5.5 Contingency Liquidity Plan

CHAPTER 6 Conclusions

6.1 Funding Liquidity

6.2 Profitability Impact of Larger Counterbalancing Asset Stocks

6.3 Pricing and Liquidity

6.4 Lessons Learnt

Bibliography

Index

EULA

List of Tables

Chapter 1

Table 1.1

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Table 2.6

Chapter 3

Table 3.1

Table 3.2

Table 3.3

Chapter 5

Table 5.1

List of Illustrations

Chapter 1

Figure 1.1

Central banks' official rates.

Figure 1.2

ECB monetary policy corridor.

Figure 1.3

EU gross liquidity shortfall. Each line represents a country.

Figure 1.4

Banks' volume of high quality liquid assets eligible by introduction of LCR as a percentage of gross liquidity shortfall, single bars referring to an individual country.

Chapter 2

Figure 2.1

Liquidity ladder structure.

Figure 2.2

Most relevant liquid asset types in European banking, December 2012.

Figure 2.3

LCR by country: 2012 EBA exercise. EU aggregates – each column represents a country.

Figure 2.4

1

These orders are routed from the Investment Firms (one is a buyer, the other is a seller) to their respective Executing Brokers.

2

The Executing Brokers send the orders to the appropriate Marketplace for the security being traded. The Marketplaces respond with executions (‘fills’).

3

The Executing Brokers send the fills to the Clearing Broker that was designated by the Investment Firms. Many Executing Brokers are themselves Clearing Brokers, a process which is called ‘self-clearing’.

4

The Marketplace(s) and the Clearing Brokers compare their shares/money to make sure that they match. This is referred to as ‘Street-Side matching’.

5

The Investment Managers inform their respective Custodians what they should expect to receive/deliver from the Clearing Brokers, and the Custodians perform this comparison. This is referred to as ‘Customer-Side matching’. This occurs the day of the trade (T+0). On the Settlement Date (which is usually up to 3 days after the Trade Date, the date when the actual trade occurred), the Clearing Brokers will deliver/receive the match amount of shares/money to settle the trade with both Investment Firms.

Figure 2.5

Cases of high risk of funding liquidity concentration.

Chapter 3

Figure 3.1

A bank's exemplificative deposits evolution.

Guide

Cover

Table of Contents

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Acknowledgements

In hoping this text is of interest and help in assessing and understanding liquidity risk, my first and greatest debt of gratitude goes to Werner Coetzee, Executive Commissioning Editor at Wiley, for suggesting and inspiring me to write it, but mostly for holding me to completing it when my first son's arrival kindly changed my private life and free time. A special mention is also owed to Carlo Magnani for his previous support and contribution. Lastly, I want to mention the many people over these difficult past years that have worked together with me on liquidity risk and deserve to be mentioned, without order or priority: Gianni Capezzuoli, Mario Prodi, Elena Conserva and Attilio Napoli.

The opinions and indications presented in this book are those of its author and do not represent that of UniCredit Group.

This book is dedicated to my wife Tanya and my son Andrea. And to the Lighthouse for showing us the way.

Introductory Note

This book was first conceived of and begun two years ago, at the peak of what it is now commonly referred to as the Greek financial crisis. As many well remember, it was the nadir of the financial crisis, triggered by the chain of problems from Ireland, Portugal and then Greece, resulting in state rating downgrades and endless discussions in Brussels and Frankfurt about the way to solve the apparently unresolvable liquidity troubles. All this while the Lehman crisis was barely one year old. Then the contagion fear that affected the Republic of Italy, one the largest sovereign debt issuers in the world, spread and the troubles quickly also reached Spain, with the Bankia and Spanish banking sectors in dire straits and receiving European financial help. Many governments fell, dragged down by extremely high refinancing costs, unemployment rates and falling growth rates.

Things have changed since. Mario Draghi's appointment at the helm of the European Central Bank and the pledge to assure unlimited support by the ECB on CEE Euro state members in August 2012 have been turning points in the delicate and complex liquidity transmission mechanism. Though liquidity market normalization is still distant, significant steps forward in recent months, including ECB Long Term Repurchasing Operations, have ensured liquidity to banks and cooled concerns. At least for the time being.

Despite the exceptional environment and events, this book is not a descriptive chronicle of crises and political or monetary fallouts, but rather an attempt to present experiences and indications on liquidity funding risks, starting from a detailed reading and commentary on the bulky and often cumbersome regulatory texts. The reminders and references to regulations are a key driver as they will, in the end, inevitably be dealt with and will constitute compulsory requirements for most banks.

This thread is followed through the first five chapters. The first is meant to present liquidity risk management in current financial markets and banking, with a first indication of how funding liquidity is an increasingly relevant factor to control and manage, together with an overview of regulatory frameworks.

The second chapter focuses on funding liquidity in the shorter maturities, up to one year and mostly within the immediate refinancing time horizons that were so critical during the Lehman crisis and are at the heart of the new regulatory liquidity frameworks. The analysis will touch upon the construction and use of the cash flow ladder, moving on then to the calculation of the liquidity coverage ratio. Related to short-term obligations are the monitoring of specific risk indicators and the intraday liquidity risk, which is particularly important for banks' treasury operations. The analysis concludes with the funding concentration assessment, a necessary component for a complete grasp of exposure and sound funding risk management.

Liquidity risk is also a matter of balance sheet sustainability, and the third chapter touches on structural funding strategies and valuation. It is here introduced as the Net Stable Funding Ratio, with a depositor's modelling overview completing it, essential for any meaningful analysis on funding stability. These are combined with scenario and stress testing, cash horizons and liquidity buffers, included here as components for the structural funding strategy rather than in the short-term section.

Chapter 4 is included mostly for completeness and is a rapid overview of liquidity value at risk models and measurement techniques other than those in Chapters 2 and 3; it should indeed be the subject of a dedicated work and presented here is a compact and essential concept description, distinguishing liquidation adjusted value at risk on the assessment of impact on securities for forced disposal of available amounts and the market liquidity Value at Risk, measuring the VaR for different levels of market depth for different security types.

Chapter 5 looks more at governance rules and processes to adequately control liquidity risks, looking at regulatory indications and providing insights on reporting and control standards, limit setting and contingency planning.

CHAPTER 1Funding and Market Liquidity

We introduce funding liquidity risk in this first chapter and the stance of some regulators on the controls expected. The first section highlights some facts, events and changes in market conditions that have increased the importance of this risk type, so relevant in recent years. It should also provide an overview of the challenges that banks' treasury functions will face and will suggest how a financial institution could address and possibly manage them, in particular when one is experiencing stressed, difficult market conditions. The second section presents some indications on the management of liquidity funding risk, based on the author's experience and lessons learnt. The third and longest section describes and comments on regulatory frameworks – focusing on the International Basel Committee, EBA, PRA, USA FED – on liquidity and funding liquidity requirements and indications.