Management. A Funding Risk Handbook

Transcription

1 LiquHty Management A Funding Risk Handbook ALDO SOPRANO WlLEY

2 Acknowledgements xi bitroductony Note xlit CHARTER 1 Funding and Market UqudKy Liquidity in the Financial Markets Definition of funding and liquidity risks Managing Liquidity Risk Liquidity risk's framework Chief Risk Officer's role Regulatory Frameworks Total net cash outflows Long-term funding requirements Banks' funding Funding through securitization Behavioural changes of customers or Investors Payment systems (Korrespondent and custody activities Accounting treatment and liquidity Diversifikation of funding sources Rating agency approaches to internal methodologies 32 v

3 vi CONTENTS Transparency to the market Contingency plans 33 CHAPTER2 Short-Term FumNng Cash Flow Ladder Contractual cash flows Rules for mapping flows on the maturity ladder Flows without contractual certainty Unexpected cash flows Funds available for refinancing Funds transferability Total ladder calculation Liquidity Coverage Ratio Regulatory prescriptions Liquid assets available for refinancing Total net cash outflows in the upcoming month Liquidity Risk Indicators Using indicators Testing indicators Government bond yield curves and cross-spreads Credit default swap levels Foreign exchange cross-values Central bank refinancing Crisis indicators Risk aversion Indexes Intraday Liquidity Risk Intraday liquidity management Cooperative mechanism 71

4 Contents Vi Analysing the possible impact of the stressed scenario on intraday liquidity risk Haircuts to pledges Monitoring requirements Structural and intraday liquidity needs Payment systems' liquidity saving features Intraday liquidity risk in the case of Lehman Brothers Some intraday liquidity monitoring indicators Intraday liquidity stress scenarios 82 Funding Concentration Significant counterparties Significant instruments/products Significant currencies Time buckets 87 Measuring Asset Liquidity Standard liquidity ratio Determining implied spread 90 CHARTER 3 Long-Term Ralance Structural Funding Determining the available funding Required stable funding for assets Customer Deposit Modelling Regulatoiy approaches on deposit stability Depositor behaviours Modelling assumptions and impacts on funding costs Dynamic regression models Stress Testing and Scenario Analysis Using stress testing to improve banks' own risk governance 112

5 VH CONTENTS Liquidity stress testing rationale Improving controls Stress testing methodology Reverse stress testing Scenario analysis Internal capital and stress testing 122 CHAPTER4 Uquklty Value At Risk Market Liquidity Effects Market volatility Market Liquidity Value At Risk VaR Liquidation-Adjusted Exogenous and endogenous liquidity risk in the VaR model Liquidity risk horizons 4.4 Cash Flows At Risk CHARTERS Control Framework Governance Principles Control Processes Functions in charge of liquidity risk management and control Risk committees Coordinating liquidity management Liquidity risk monitoring function Addressing documentation-related liquidity risks Monitoring Liquidity Exposure Available assets for refinancing Funding concentration 157

6 Contents ix Liquidity coverage ratio and NSFR in the various currencies Market-related monitoring tools Overall market Information Information on the financial sector Company-specißc Information Recommendations on the monitoring process Reporting frequency and distribution Setting Liquidity Risk Limits Limit setting and review Reporting and escalation procedures Internal rules on limit setting and management Contingency Liquidity Plan Outlining the contingency funding plans Internal procedures for CFP 168 CHARTER 6 Conclusions Funding Liquidity Profitability Impact of Larger Counterbalancing Asset Stocks Pricing and Liquidity Lessons Learnt 171 Bibliography 173 Index 181