Liquidity Management: A Funding Risk Handbook

CHAPTER 3 Long-Term Balance

Funding liquidity is a risk that arises in the short term but the seeds for this to become a major exposure for a financial institution are spawned in the medium- and long-term strategic management of the interest and refinancing of the bank's balance sheet. Funding liquidity therefore becomes hard to manage in cases where the bank hasn't correctly taken into account the dynamics of deposits, refinancing, asset re-pricing and growth. This third chapter tries to address both the metrics and the risk management elements to consider for a sound long-term balance of assets and liabilities. In the first part we analyse the net stable funding ratio as set by the Basel capital accord and assess the implications and validity for the bank's funding control. In the second, an insight into sight deposits modelling, looking then at the statistical methods and assumptions banks can make on their private customers' behaviours and the reliability of such assumptions in stressed market conditions. The third section then looks at stress testing and scenario analysis for both the assets and liabilities, looking at the impact of such hypotheses on funding liquidity, these being useful to address longer term balance. Lastly, in the fourth section, the size and quality of the securities available for refinancing are analysed, as this is also an element to consider for longer term balancing and liquidity management.

3.1 STRUCTURAL FUNDING

While the very survival ...