1. Funding liquidity risk
    • Inability of an insr to meet liability obligation when they come due as the result of insufficient liquid assets
    • Consequences: forced sale or early liquidation may result in addl mkt value losses
  2. Sources of liquidity risk
    • Credit rating downgrade: → more demand for collateral from investors or early withdrawal from customers
    • Negative publicity: loss of confidence
    • Changes in the economic environment
    • Reports of problems at similar companies
  3. Company-specific issues increasing liquidity risk
    • Heavy concentration of business w/ small # of counterparties
    • Smaller companies may have fewer funding sources
    • Some companies sold products w/ embedded put options → possibility of withdrawal on short notice
    • Some companies may not have access to short term credit facilities
    • Over-concentration on particular assets or liabilities
  4. 3 levels of liquidity risk
    • 1. Day to day cash management
    • 2. Intermediate term cash flow management
    • 3. Stress liquidity risk management
    • 1 & 2 usually only require the company to conserve cash flow and access to credit line, while 3 may imply forced liquidation
  5. Stress liquidity risk management process
    • Product design: embedded options
    • PF strategy: consider nature of product
    • Systematic monitoring: both at BU and corporate level
    • Prepardness to act: in order not to overlook contractual rights available
    • Communication & coordination: across all BUs
  6. 4 major sources of liquidity
    • Asset sale: starting w/ most liquid
    • Asset securitization: in order monetize cash flows up front
    • Borrowing: through pre-agreed lines of credit
    • Increase WP: probaly not optimal
  7. 7 liquidity risk reduction techniques
    • Cash flow matching
    • Asset diversification
    • Product diversification
    • Laddered/Staggered liability maturities
    • Hold highly liquid assets
    • Establish lines of credit
    • Purchase put options
  8. 2 techniques to measure stress liquidity exposure
    • Cash flow modeling: /!\ developing true stress scenarios
    • Liquidity ratios: monitor those on a ongoing basis
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