Liquidity risk is the risk of loss arising from an inability to quickly realize asset value or obtain funding and can be damaging if not properly considered or actively managed. Lack of liquidity can lead to large losses in asset/liability portfolios and off balance sheet activities and in extreme cases can trigger financial distress and insolvency. Liquidity Risk is a comprehensive treatment of the topic focusing on the nature of the risk, problems that arise in asset and funding liquidity and mechanisms that can be developed to monitor, measure and control such risks.
Author(s): Erik Banks
Series: Finance and Capital Markets Series
Publisher: Palgrave Macmillan
Year: 2005
Language: English
Pages: 253
Cover......Page 1
Contents......Page 6
List of figures......Page 12
List of tables......Page 14
List of boxes......Page 16
Acknowledgments......Page 18
The author......Page 20
List of acronyms......Page 22
PART I ELEMENTS OF CORPORATE LIQUIDITY......Page 24
Definitions of liquidity risk......Page 26
Liquidity, risk, and the corporation......Page 30
Market risk, credit risk, and liquidity risk......Page 34
Overview of the book......Page 36
Liquidity operating requirements......Page 37
General approaches to liquidity management......Page 40
Financial imperatives......Page 41
External requirements......Page 42
The liquidity risk/return trade-off......Page 43
Liquidity profiles across industries......Page 45
Endogenous versus exogenous liquidity......Page 55
3 Sources of liquidity......Page 59
Sources of asset liquidity......Page 60
Sources of funding liquidity......Page 65
Sources of off-balance sheet liquidity......Page 74
Amalgamating liquidity sources......Page 79
PART II LIQUIDITY PROBLEMS......Page 84
4 Funding liquidity risk......Page 86
Sources of funding liquidity risk......Page 87
Exogenous considerations......Page 94
The nature of funding problems......Page 95
The effects of funding liquidity risk......Page 99
5 Asset liquidity risk......Page 101
Exogenous considerations......Page 104
The nature of asset problems......Page 106
The effects of asset liquidity risk......Page 113
Joint asset and funding risks......Page 115
The liquidity spiral......Page 120
Financial distress......Page 126
7 Case studies in liquidity mismanagement......Page 128
Drexel Burnham Lambert (1990)......Page 129
Askin Capital (1994)......Page 132
Orange County (1994)......Page 134
Long Term Capital Management (1998)......Page 137
General American (1999)......Page 140
Swissair (2001)......Page 142
Enron (2001)......Page 145
PART III MANAGING LIQUIDITY RISKS......Page 150
Common liquidity measures......Page 152
Governance structure......Page 179
Liquidity risk mandate......Page 181
Management duties and responsibilities......Page 184
Liquidity risk controls......Page 185
Other safeguards......Page 202
Liquidity risk monitoring......Page 205
Scope and focus......Page 212
Ex ante market access......Page 215
Defensive measures......Page 216
Communications......Page 220
Invoking and terminating the program......Page 221
Testing the plan......Page 222
11 Summary: toward active liquidity risk management......Page 224
The micro role: best practices......Page 225
The macro role......Page 228
Notes......Page 234
Selected references......Page 246
C......Page 250
F......Page 251
M......Page 252
V......Page 253
