Liquidity Management: A Funding Risk Handbook

CHAPTER 2 Short-Term Funding

Funding liquidity risk differs at a glance from the more generic liquidity risk, for it is intended as a measurement of immediate survival risk, the possibility that in the days or weeks to come a company might fail in its financial payment obligations. It is a kind of binary risk, and is mostly focused on the closest time maturities. This chapter is thus central for understanding and assessing funding liquidity risk. It presents the cash flow ladder, the survival method applied by treasuries to check inflows and outflows. It moves on to Basel 3's Liquidity Coverage Ratio analysis, also meant for shortest term control. Then, different indicators or sensors of liquidity are presented, taken from internal and external market sources, aiming to measure the temperature of funding liquidity and possibly anticipate anomalies and future difficulties in refinancing. Such exposures are mostly driven by intraday payment flows, and this is covered in a dedicated section. This chapter on funding liquidity risk management closes with an analysis of sources of liquidity and their concentration.

2.1 CASH FLOW LADDER

Liquidity risk measurement can be split into two components: the short-term one for refinancing contractual obligations up to one year and which is focused on the most immediate of those – overnight, one week or 30 days, or two or three months – is the focus of this chapter as the risk measurement methodologies differ substantially from those ...