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The Liquidity Risk Management Guide: From Policy to Pitfalls

Book Description

Liquidity risk is in the spotlight of both regulators and management teams across the banking industry. The European banking regulator has introduced and implemented a stronger liquidity regulatory framework and local regulators have made liquidity a top priority on their supervisory agenda. Banks have accordingly followed suit. Liquidity risk is now a topic widely discussed in boardrooms as banks strive to set up a strong and efficient liquidity risk management framework which, while maintaining sufficient resources, does not jeopardize the necessary profitability and return targets.

The Liquidity Risk Management Guide: From Policy to Pitfalls is practical guide for banks and risk professionals to proactively manage liquidity risk in a systemic way. The book sets out its own comprehensive framework, which includes all the various and critical components of liquidity risk management. The recommendations are based on experiences from the recent financial crises, best practices and compliance with current and future regulatory requirements, with special emphasis on Basel III.

Using the new 6 Step Framework, the book provides step-by-step guidance for the reader to build their liquidity management framework into a new overarching structure, which brings all the different parts of liquidity risk into one approach. Special attention is given to the challenges that banks currently face when adopting and implementing the Basel III liquidity requirements and guidance is given on how the new metrics can be integrated into the existing framework, providing the most value to the banks instead of being a regulatory reporting matter.

Table of Contents

  1. Preface
  2. 1 Introduction
    1. 1.1 The importance of an overarching liquidity risk management framework
    2. 1.2 The ‘6 Step Framework’
    3. 1.3 The structure of the book
    4. Endnotes
  3. 2 Primer in Banking
    1. 2.1 Risk in banking
    2. Endnotes
  4. 3 The ALM Function – The Framework on Top of Liquidity Management
    1. 3.1 ALM within Risk, Finance and the Businesses
    2. 3.2 The Asset–Liability Committee (ALCO)
    3. 3.3 Areas covered by ALCO
    4. 3.4 Enhanced role of the ALM unit
    5. Endnotes
  5. 4 Liquidity – Background and Key Concepts
    1. 4.1 Definitions and more definitions
    2. 4.2 The Liquidity Gap
    3. 4.3 The timing factor of liquidity risk: Tactical, Structural and Contingent
    4. 4.4 It's all about the ‘L’ Word
    5. 4.5 Liquidity, Solvency and Capital
    6. 4.6 Liquidity from a macroeconomic perspective – the singular case of Contagion Risk and Asymmetric Information
    7. Endnotes
  6. 5 The Appropriate Liquidity Framework – Introduction to the ‘6 Step Framework’
    1. 5.1 Setting the stage – from Policy to a Practical Framework
    2. 5.2 The heightened regulatory focus on liquidity
    3. 5.3 Recommended Liquidity risk management framework – The ‘6 Step Framework’
    4. Endnotes
  7. 6 Step I: Sources of Liquidity Risk
    1. 6.1 The 10 Sources of Liquidity Risk
    2. Endnotes
  8. 7 Step II: Risk Appetite
    1. 7.1 The Risk Appetite Statement
    2. 7.2 Drawing up a Risk Appetite Statement
    3. 7.3 The Liquidity reserve
    4. Endnotes
  9. 8 Step III: Governance and High-Level Policy
    1. 8.1 The role of the Board of Directors
    2. 8.2 The role of senior management
    3. 8.3 High-Level Liquidity Policies and Strategies
    4. 8.4 Liquidity Policy
    5. 8.5 Funding Strategy
    6. 8.6 Funds Transfer pricing
    7. Endnotes
  10. 9 Step IV: The Quantitative Framework
    1. 9.1 Different ways to measure liquidity
    2. Endnotes
  11. 10 Step V: Stress Testing and the Contingency Funding Plan
    1. 10.1 Stress testing – the heart of the Liquidity Framework
    2. 10.2 Final note on scenario stress testing
    3. 10.3 Contingency Funding Plan (CFP) – the SPADE of the Liquidity Framework
    4. Endnotes
  12. 11 Step VI: Reporting and Management Information
    1. 11.1 Internal Controls and Internal Audit Processes
    2. Endnotes
  13. 12 Basel III: The New Global Framework
    1. 12.1 Basel III – Beyond the Buzzwords
    2. 12.2 The Basel III liquidity ratios
    3. 12.3 The Liquidity Coverage Ratio (LCR)
    4. 12.4 The Net Stable Funding Ratio (NSFR)
    5. Endnotes
  14. Bibliography
  15. Index
  16. End User License Agreement