Liquidity Risk Management

Liquidity risk has been one of the main drivers of the current credit crisis. This workshop will give an overview of the challenges and recommendations for liquidity risk management going forward. Participants will be equipped to:

Objectives

Review liquidity management lessons learned from the current crisis.
Use a structured approach to assess liquidity risk management, asset and liability management and funding strategy.
Understand how banks forecast, control and stress-test their liquidity sources and use (on and off balance sheet) and build a contingency funding plan to address stress cash outflows.
Identify banks with weak liquidity and contingency planning within the context of the bank’s role within the financial system.
Anticipate changing regulations and supervisory guidance on the management of bank liquidity.

Venues & Dates

Dublin: TBD
London: TBD
Dubai: TBD
Edmonton (CAN): TBD
Lagos/Abuja: TBD

Cost: $4,000 per participant (USD) (=N=)

For Whom

Regulators, Analysts, Risk & Banking professionals who need to better understand liquidity risk management challenges & strategy within a bank.
The course is targeted at an intermediate level and assumes a basic understanding of banking products and services.

Snapshot of Course Content

Analytic Overview

Defining liquidity risk: funding and market liquidity
Key drivers: asset liquidity and funding needs, funding strategy
Perception of the relative importance of liquidity risk amongst bankers
Impact of liquidity crisis: deposits, creditors, and systemic issues
Fundamental principles (Basel Principle 1): risk management framework within the overall risk management of a bank
Inter-relationship between liquidity, credit, market, operational, legal and reputation risks
Supervisory role: expectations and remedial actions

Governance

Liquidity risk tolerance (Basel Principle 2) given different business models (retail, wholesale, multinational, investment banks)
Strategies, policies, and practices (Basel Principle 3)
Liquidity costs, benefits, and risks (Basel Principle 4)
Early warning signals of unacceptable risk tolerance
Depositor Insurance schemes underpinning liquidity in the retail market
Banks which failed due primarily to weak liquidity management
Exercises: liquidity risks associated with excessive leverage in an opco/holdco structure
Costs associated with failure to adequately price for liquidity

Asset Liquidity and Funding Needs

Asset and liability management goals: practical considerations
Liquidity of assets under stressed market conditions
Contingent liquidity obligations – securitization, conduits and derivatives
Stability of funding and appropriateness for asset base
Defining minimum risk assets and liquid assets
Key matrices to measure asset liquidity and funding needs
Forecasting funding needs: key assumptions of asset growth, inflows, outflows, contingency funding
Fair valued asset pricing hierarchies (Level 1, 2, 3 under SFAS 157 & IFRS 7)
Collateral assessment: haircuts, margin, available collateral, client balances, central bank eligibility
Exercises: liquidity risk in a commercial bank caused by contingent liquidity exposures
Calculation of stressed liquidity outflows and cash capital requirements

Stress Liquidity Needs

Early warning signals: illiquidity spirals, institution-specific and market-wide stress scenarios
Interaction between liquidity and other risks: market, credit, interest rate, legal, operational, reputation
Systemic risk and impact on market/funding liquidity
Stress-tests: scenarios on activities, products, and funding sources
Trigger events: rating changes, market disruption, securitization triggers

Funding Strategy / Asset and Liability Management

Funding appropriate for the risk profile and commercial needs
Issues: stability, diversity, tenor matching of funding sources
Refinancing risk of bonds and money market funding
Key issues: off-balance sheet, derivatives, securitisation, intraday
Gap management across tenor and currency buckets
Cash capital techniques to fund illiquid assets and stress outflows
Key matrices for measuring funding strategy and refinancing risk
Forecasting funding cash-flows: intraday, daily, short/long-term
Contingency funding plan and stress-testing
Back up liquidity: unencumbered assets, liquidity pool, committed facilities, central bank facilities

Monitoring and Controls

Funding and liquidity mismatch limits across entities, business lines, currencies and jurisdictions
Cumulative contractual cash-flow mismatch limits
Operational management of intraday payments and settlements

Supervision

Inter-relationship between liquidity regulation, capital adequacy and prudential measures
Comparison across regulatory regimes: qualitative and quantitative standards
Liquidity risk tolerance given systemic risk
Role of deposit insurance in a liquidity crisis
Regulatory responses: guarantees, insurance, recapitalisation, bad banks
Remedial actions: strengthen liquidity risk management and contingency planning
Basel II pillar III disclosure requirements on liquidity
Basel III: Liquidity Coverage Ratio & Net Stable Funding Ratio
Regulatory responses and bank resolution: liquidity vs solvency failure
Case studies