The Liquidity Risk Management Guide: From Policy to Pitfalls

Preface

For the past few years liquidity problems have taken centre stage for banking and economic policy. The first wave of the tsunami almost paralysed the funding markets and exposed considerable vulnerabilities within the banking liquidity management. In the absence of suitable solutions and improvements, banks started hoarding cash, which in turn has yet created other kinds of imbalances and liquidity complications. This response was in many cases orchestrated by the regulators.

Part of the problem with liquidity risk lies in its abstract nature. Unlike other types of risk embedded in banking, some of which banks deal with every day, liquidity risk losses are few and far between. Due to the dire consequences of running out of liquidity, both to the bank itself and the wider economy, liquidity failure or losses cannot be assumed to be part of the risk/reward business of banking. Therefore, liquidity risk management can become a world of hypothesis where risk professionals can go happily through their whole career of being the ‘liquidity fire-brigade’, without ever seeing fire or smelling smoke.

The initial idea for this book came after I worked for one of the Icelandic banks during the last financial crises. After spending years in the United Kingdom and Germany helping banks and funds investing and providing liquidity, I was now on the other side of the equation sourcing funds and liquidity. Having a first-hand experience of how the liquidity fire can go from a distant ...