-
Liquidity
- ability of a company to meet expected and unexpected demands for cash, while suffering minimal losses
- depends on both types of assets & liabilities
-
Source of liquidity risk
- cr rating downgrade
- negative publicity
- deterioration of economy
- new of problems of other cpies in similar LOBs
-
Company specific sources of liquidity risk
- small group of agents / brokers control large % of bk
- small cpy: less funding access
- large cpy: mkt can't handle large liquidation volume
- unpredictable deferrable demands on cash
- lack of diversity (A / L)
-
3 levels of liquidity mgt
- day to day cash mgt: ST liq needs
- ongoing / intermediate term: 6-24 mths, involves (1) restructuring pf (2) selling +/- (3) diversity (4) chg in strategy
- stress liquidity mgt: cat risk
-
Stress liquidity mgt process
- product design vs pf strategy
- monitoring
- preparedness to act
-
Available sources of liquidity
- asset sales: should have priority order. Some liquid assets may become illiquid in stress scenarios
- asset securitization
- borrowing: must pre-establish durable, ever-green cr from an issuer w a high cr rating
- selling add'l business: unless severe stress
-
Risk reduction techniques
- CF match
- diversify A / L
- ladder liabilities maturity
- back surplus / capital w liquid assets
- establish durable line of cr
- issue commercial paper
- use repurchase agreements (-) usually tie up liquid assets
-
Tools to measure stress liquidity exposure
- CF modeling: project known CF & model shock events
- liquidity ratios: liquidity adjustment haircut is diff btwn bk & fair value & estimated liquidation cost
|
|
