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Liquidity Risk (Liq Exposure Measurement (Peer group ratio comparison (Key…
Liquidity Risk
Liq Exposure Measurement
Liquidity Index
Weighted average
Fire-sale price to fair market price
Financing gap and financing requirement
Gap = avg. loans - avg. deposits; => the wider the more liquidity risk
Req = financing gap + liquidity assets
Peer group ratio comparison
Balance sheet features
Similar size and locations
Key ratios
Loans / Deposits
Maturity Ladder
Sources and uses of liquidity
Net liquidity statement => analogous to income statement
Sources of liq => revenue
Uses of liq => expense
Liquidity Planning
Life Insurance
Hold liquid assets in case of surrenders
Solvency concerns => run on the bank => no new premium; surrenders
Fire-sale of assets
Two reasons
Liability-side reason
FI needs to borrow funds or sell assets to meet withdrawal
Asset-side reason
Borrow funds or sell assets to issue loan
Two ways to manage deposit drain
Purchased Liquidity Management (PLM)
On liability side
Stored Liquidity Management (SLM)
On asset side
Must hold non-interest bearing assets such as cash