The Handbook of ALM in Banking (2nd Edition)
First published:
ISBN: 9781782723455
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Measuring and Managing Liquidity and Funding Risk
Lennart Gerlagh and Marc Otto
Introduction
Bank Capital and Liquidity
ALM in the Context of Enterprise Risk Management
The New Basel Standards on IRRBB and Their Implications for ALM
Measuring and Managing Interest Rate and Basis Risk
The Modelling of Non-Maturity Deposits
Modelling Non-Maturing Deposits with Stochastic Interest Rates and Credit Spreads
Managing Interest Rate Risk for Non-Maturity Deposits
Replication of Non-Maturing Products in a Low Interest Rate Environment
Managing Mortgage Prepayment Risk on the Balance Sheet
Considerations for ALM in Low and Negative Interest Rate Environments
Credit Spreads
Hedge Accounting
Supervisory Views on Liquidity Regulation, Supervision and Management
Measuring and Managing Liquidity and Funding Risk
Managing Reserve Assets
Instruments for Secured Funding
Asset Encumbrance
Capital Management
A Global Perspective on Stress Testing
Reverse Stress Testing: Linking Risks, Earnings, Capital and Liquidity – A Process-Orientated Framework and Its Application to Asset–Liability Management
XVAs and the Holistic Management of Financial Resources
Optimal Funding Tenors
Funds Transfer Pricing in the New Normal
Balance-Sheet Management with Regulatory Constraints
Credit institutions define liquidity management objectives as part of their strategy execution plans. Liquidity management activities are typically delegated to asset and liability management (ALM) and/or treasury functions that identify, measure and manage the liquidity position of the bank in a robust framework based on a defined risk appetite. This implies that ALM and/or treasury need to have an insight into the current and projected liquidity profile of the balance sheet (for both on- and off-balance-sheet positions) and manage the liquidity mismatch that results from the bank’s maturity transformation role. Credit institutions will also have an independent risk function in place to identify the inherent liquidity risks and provide assurance that these risks are (and will continue to be) effectively managed and mitigated within the risk appetite of the credit institution.
DEFINITION OF LIQUIDITY RISK
Liquidity risk can be divided into two subcategories.
- 1.
Funding liquidity risk: this is the risk arising from the potential inability of the bank to meet both expected and unexpected current and future cashflows and collateral needs. Funding liquidity risk can be
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