The Counterbalancing Capacity

Robert Fiedler

We introduced the counterbalancing capacity in Chapter 4 (see “The counterbalancing capacity”) as a part of the illiquidity risk measurement process. Now we will develop a model of the CBC that can be practically implemented in a bank.¹¹In fact, the author has implemented this model, or derivatives of it, in several banks. This is crucial because, while previous chapters have focused predominantly on measuring illiquidity risk, we also need to know what to do to protect against it and manage it. This chapter provides solutions to this problem.

From an illiquidity risk perspective, we have to deal with two different uncertainties.

The factual future nostro balance may deviate from the forecasted FLE, which, in an illiquidity risk view, can be a risk but also a chance.

Assume we have managed to bypass the above problem, and know that the bank will, on a day $t_{\mathrm{F}}$ in the future, inevitably end up with a cash deficit $FLE(t_{\mathrm{F}})$ on its nostro. An uncertainty now arises as to whether the bank will be able to generate enough cash until $t_{\mathrm{F}}$ to counterbalance the forecasted deficit and finally end up with a non-negative nostro.

In order to answer this question we