Managing Liquidity Risk in Financial Institutions

Course Outline

Learn processes and techniques for measuring funding liquidity and market liquidity risks. Understand the link with other “traditional” risk classes such as credit, market and operational risks.

Topics include: liquidity coverage optimisation, liquidity risk mitigation, best practice in contingency liquidity planning and effective stress testing. The programme also covers the new regulatory framework for liquidity coverage in financial institutions (“Basel III”).

Many practical case studies are taken directly from the liquidity crisis of 2007 – 2008. “Best and worst in class” examples are given and lessons drawn from recent experience.

Who The Course is For

  • Risk managers and risk controllers
  • Banking and insurance/ reinsurance treasury professionals
  • Auditors (internal and external)
  • Fixed Income traders (cash and derivatives)
  • IT professionals specialised on treasury systems
  • Executives who are members of ALCOS (asset – liability committees)

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Prior Knowledge

It is assumed that participants are familiar with a bank's treasury operations and fundamental market instruments such as swaps, swaptions, FRAs, futures and vanilla FX derivatives. 


This program is eligible for 24 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Definition of Liquidity

  • Funding liquidity vs. market liquidity
  • Fitting into the Enterprise Risk Management framework:
    • Market risk
    • Default risk
    • Credit migration risk
    • Operational risk
    • Business risk
  • Liquidity and financial operations
    • Operating requirements for banks, investment funds and insurance companies
    • General approaches to liquidity management
    • External requirements
    • The liquidity risk/return trade-off
    • Endogenous vs. exogenous liquidity

Case Study: A typical liquidity profile

Sources of Liquidity

  • Liquid assets
    • Cash and marketable securities / Receivables / Inventories
  • Fixed assets and intangibles

Sources of Funding Liquidity

  • Short term funding markets
    • CP, ECP / Short term bank facilities / Payables / Deposits and repurchase agreements
  • Medium & long term funding markets
    • MTNs & Euro-note facilities / Funding agreements and GICs / Long term bonds / Loans
  • Equity capital
  • Off balance sheet liquidity
    • Securitisation / Contingent financing / Leases / Derivatives  

Day Two

Funding Liquidity Risk

  • Unpredictable cash flows
  • Unfavourable legal / Regulatory actions
  • Mismanagement
  • Negative perceptions / Market actions

 Exogenous Considerations

The Funding Problems in Practice

  • Rollover issues / Lack of market access / Commitment withdrawal / Excessive concentrations

Case Studies: The effects of funding liquidity risk: HVB, DEPFA

Asset Liquidity Risk

  • Sources
  • Exogenous considerations
  • Asset Issues:
    • Lack of marketability / Lack of unencumbered assets / Excessive concentrations / Misvalued assets / Insufficient collateralisation

Case Study: Bayern LB

Financial Distress – Lessons from the Crisis of 2007-2009

  • Joint asset and funding risk
  • The “liquidity spiral”
    • Debt investors viewpoints / Rating agencies / Management
  • The crisis from a liquidity viewpoint
  • Famous pre-crisis cases
    • Drexel Burnham Lambert / Askin Capital / Orange County / LTCM / Swissair / Enron

The “Post Lehman Brothers” Crisis

  • Causes vs. effects: Depfa Plc, Bayern LB, Commerzbank / Dresdner, Northern Rock, RBS

Day Three

Measuring Liquidity Risk

  • Liquidity ratios
  • Liquidity gaps
  • Relationship to re-pricing gaps
  • Financial instrument liquidity measures: VAR & LVAR
  • Haircuts
  • Stress tests
    • Market parameters / Cash flows / Asset disposals & pledging / Funding / Covenants & terminations / Collateral / Currency exposures / Event risks & joint scenarios

Liquidity Risk Control

  • Governance structure
  • Mandate
    • Risk Plan / Resources: Budgets, HR / Duties & responsibilities
  • Asset liquidity control
    • Limits on liquid & fixed assets / Collateral / Pledging limits
  • Funding liquidity control
    • Diversified funding limits and committed facility limits – Example: Credit Suisse
  • Joint liquidity control
    • Cash flow gap limits – Example: HVB (Unicredit) / Balance sheet target limits / Hybrid ratio limits
  • Off balance sheet control
    • Forward commitments & contingencies
  • Other safeguards for liquidity
    • Reserves / Mark & model verification / Penalty systems
  • Liquidity risk monitors
    • Asset & funding portfolios / Off balance sheet commitments & contingencies / “Forward balance sheet” / Stress tests / General indicators

New regulation on bank liquidity - CEBS, MaRisk, FSA and Basel III

  • The new capital adequacy guidelines
  • Capital qualification criteria (t1, 2 & 3)
  • Deposit stability ratios
  • Impacts on banking businesses (QIS based)

Crisis Management

  • Ex ante market access
  • Defensive Measures
    • Recentralisation
    • Funding management
    • Prioritising funding draw-downs / Extending liabilities maturities / Suspending cash flows
    • Risk Hedging  
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