Liquidity Risk Management

• Liquidity Risk and Liquidity Crises
• The Links between Liquidity, Market and Credit Risk
• Assessing Bank and Market Liquidity Risk
• Liquidity Ratios, Liquidity Curves and Liquidity-at-Risk
• Liquidity Ratios under Basel III
• Liquidity Black Holes and Liquidity Stress Testing
• Tools for Liquidity Risk Management
• Liquidity Pricing

The purpose of this seminar is to give you a good understanding of liquidity risk and of the tools and techniques for managing this type of risk.

We start with a general introduction to liquidity risk and explain the difference between “cash flow risk” and “market liquidity risk”. We explain how liquidity risk has become tightly integrated with market, credit and operational risk, and we give examples of how the complex interactions between these risks may result in major financial disasters and global liquidity crises.

We then present and explain a number of tools for assessing liquidity risks, including liquidity risk indicators, cash flow projections and the “liquidity curve”. We also present and explain in detail the new liquidity ratios under the Basel III framework (Liquidity Coverage Ratio and Net Stable Funding Ratios). We give practical examples and discuss the challenges for financial institutions in meeting these requirements. We also explain how a financial institution can use asset liquidity modelling, liquidity stress testing and long term liquidity profiling, and we explain how the liquidity risk of non-maturing assets and liabilities is linked to interest rate risk, and how this risk can be quantified using stochastic modelling techniques.

Further, we explain how liquidity risk can be managed within the context of an integrated risk management program. We present a number of liquidity management tools, including “contingency planning” and financing instruments such as repos and money market facilities. We also explain how the “securitization” technique has been used to turn illiquid assets into marketable securities, and we discuss the role of this type of financing in a “post-crash” environment.

Finally, we look at liquidity costs and liquidity pricing factors, and we explain the process of “liquidity pricing” in an ALM context.

The course will be highly practical and will provide you with tools that you can use in your day-to-day and strategic liquidity management.

13.00 - 16.30 Assessing Market Liquidity Risk

• The Relationship between Market and Liquidity Risk
• Measuring Market Liquidity Risk of Treasuries
  • Bid/ask Spread
  • Trading Volume, Size and Frequency
  • Price Impact
  • Price Volatility and Yield Spread
• Measuring Market Liquidity Risk of Corporate Bonds
  • Liquidity Indicators
  • How to Separate Liquidity Spread from Credit Spread
• Liquidity Risk of Emerging Market Investments
• Measuring Liquidity in Futures and Swaps Markets
  • Open Interest and Volume
  • Liquidity and Swap Spreads
• Liquidity Shocks and Liquidity “Black Holes”
• Practical Case Studies:
  • LTCM, “Subprime” and other Liquidity Crises
• Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Managing Liquidity Risk in Practice

• Sound Practices for Liquidity Risk Management
  • Developing a Structure for Managing Liquidity Risk
  • Measuring and Monitoring Net Funding Requirements
  • Managing Market Access
  • Contingency planning
  • Foreign Currency Liquidity Management
  • Examples of Liquidity reporting
  • Internal Controls for Liquidity Risk Management
  • Basel Committee "Principles for Sound Liquidity Risk Management"
• A Closer Look at Practical Tools for Liquidity Management
  • The Source Continuum
  • Contingency Funding Planning
  • Liquidity and Underwriting Facilities
  • MTNs, CDs, CPs, asset-backed CPs and Repos
  • Securitization and Synthetic Securitization
  • Gaining Access to Central Bank Liquidity in a Crisis Situation
• A Rating Agency’s Perspective on Liquidity Risk management
• Practical Case Studies and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Liquidity Pricing

• Reasons for Liquidity Costs
• Defining Liquidity Costs and the Pricing Factors
  • Structural Liquidity Costs
  • Contingent Liquidity Costs
• A Liquidity Traders View
  • Long vs. Short cash
  • Rate paid vs. Rate Achieved
• Balancing the Costs of Overfunding/Underfunding
• Liquidity Cost Curves
• Fund Transfer Pricing
  • Transfer Prices for Liquidity
  • Liquidity Pricing for Specific Asset and Liability Classes
  • The Role of FTP in Economic Capital Allocation and Risk Adjusted Performance Measurement
• Practical Case Studies and Exercises

Evaluation and Termination of the Seminar