The Liquidity Risk Book


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A Bank's Different Types of Liquidity Risk

As the recent financial crisis shows, liquidity is not always a given and must therefore be measured as a risk in its own right.We embrace the view as expressed in the Liquidity Coverage Ratio of Basel III and focus here on illiquidity risk, the bank’s inability to execute its contractually obligatory payments. Other than insolvency risk (the danger that a bank’s assets are worth less than its liabilities), illiquidity is indicated by the bank’s upcoming cumulated cash flow profile (its Future Liquidity Exposure) and as such cannot possibly be covered by capital. As a substitute for capital, the bank must assess its capability to overcome detrimental future liquidity exposures by applying feasible liquidity generating strategies, its Counter Balancing Capacity.This process - although straightforward in principle - gets complicated in practice because of various uncertainties about data of the underlying financial transactions, possible changes in market variables, counterparty decisions and the forthcoming execution of the bank’s own business strategies.


In our White Paper we outline how to develop a consistent methodology to measure and manage liquidity risk.

– What is the right definition of liquidity risk?

– What do we really want to measure?

How are cash management, clearing and liquidity risk management related?

How to forecast the bank’s upcoming liquidity situation with the Forward
   Liquidity Exposure?

These questions answered and much more ...