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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
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
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
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
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
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 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
2 techniques to measure stress liquidity exposure
- Cash flow modeling: /!\ developing true stress scenarios
- Liquidity ratios: monitor those on a ongoing basis

Author

Exam9

65093

Card Set

3.7.AAA

Description

AAA

Updated

2011-02-09T01:40:43Z

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