Cash flow for ‘stress scenarios’

As was the case for the management of interest rate risk, liquidity risk has to be analysed for the case of a banking crisis. In such a ‘stress’ case, there will be a ‘run’ on the bank with many depositors rushing to cash in their deposits and, possibly, some borrowers being unable to meet their loan repayment.

The net cash outflow arising from such a crisis situation has to be estimated, and banks have to make sure that they have a contingency funding plan; that is, enough liquid assets to sell for survival.

Typically, banks need to be able to cope with the crisis for a few days or a week, the time needed for ...

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