Liquidity Risk Management in Banks

Course Objectives

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:

• 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 uses (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

Target Audience

Regulators, analysts, risk and banking professionals who need to better understand the liquidity risk management challenges and strategy within a bank. The course is targeted at an intermediate level and assumes a basic understanding of banking products and services. Related workshops include: Risk Management in Banks & the Capital Implications, which provides a broader overview of all risk management areas.

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

Content

ANALYTIC OVERVIEW

• Defining liquidity risk: funding and market liquidity
• Key drivers: asset liquidity and funding needs, funding strategy
• 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, e.g. retail and wholesale banks, multi-nationals and investment banks
• Strategies, policies and practices (Basel Principle 3)
• Liquidity costs, benefits and risks (Basel Principle 4)
• Early warning signals of unacceptable risk tolerance
• Banks which failed due primarily to weak liquidity management.

ASSET LIQUIDITY AND FUNDING NEEDS

Identifying and forecasting needs

• Asset and liability management goals: practical considerations
• 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 and outflows, contingency funding needs
• Collateral assessment: haircuts / margin, available collateral for access to funding, client balances, Central Bank eligibility criteria

Stress liquidity needs

• Early warning signals: illiquidity spirals, institution specific and market wide stress scenarios
• Interaction between liquidity and other risks: market and credit risk, interest rate, legal, operational and reputation risks
• Systemic risk and impact on market and funding liquidity
• Stress-tests: key scenarios relating to business activities, products and funding sources
• Trigger events: rating changes, market disruption, trigger events in a securitisation
• Case studies: comparing asset liquidity profiles of strong and weak banks.

FUNDING STRATEGY

Asset and liability Management

• Funding appropriate for the risk profile and commercial needs of the assets, products and business lines
• Issues: stability, diversity and 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 over different time horizons: intraday, day to day, under and over a year
• Case studies: weak funding strategies and gap management
• Contingency funding plan and stress-testing
• Stress-testing market access, stress market outflows
• Contingency funding plan: sufficient liquidity to meet the potential demands of stress outflows
• Back up liquidity: unencumbered assets, liquidity pool, committed facilities, Central Bank’s marginal lending facilities
• Case studies: comparing strong and weak banks under stress

Monitoring and controls

• Funding and liquidity mismatch limits across legal entities, business lines, currencies and jurisdictions
• Cumulative contractual cash-flow mismatch limits, based on risk tolerance, balance sheet size, depth of market, funding structure
• Operational management of intraday payments and settlements: due diligence.

SUPERVISION

• Inter-relationship between liquidity regulation, capital adequacy and other prudential measures
• Comparison across regulatory regimes: qualitative and quantitative standards
• Liquidity risk tolerance given systemic risk: importance of bank within payment and settlement systems
• Role of deposit insurance in a liquidity crisis
• Regulatory responses to liquidity problems: guarantees, insurance, recapitalisation, bad banks
• Remedial actions: required actions from bank to strengthen liquidity risk management and contingency planning, restrictions
• Due diligence synopsis
• Basel II: pillar III disclosure requirements on liquidity.

Workshop Times