Liquidity Risk Management. Baird Stephen

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      Liquidity Risk Management

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      Liquidity Risk

      Management

       A Practitioner's Perspective

      SHYAM VENKAT

      STEPHEN BAIRD

      Copyright © 2016 by PricewaterhouseCoopers LLP. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

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       Library of Congress Cataloging-in-Publication Data is available:

      Names: Venkat, Shyam, 1962– author. | Baird, Stephen, 1966– author.

      Title: Liquidity risk management: a practitioner's perspective / Shyam Venkat, Stephen Baird.

      Description: Hoboken: Wiley, 2016. | Series: Wiley finance | Includes index.

      Identifiers: LCCN 2016001879 (print) | LCCN 2016006247 (ebook) | ISBN 9781118881927 (hardback) | ISBN 9781118918791 (ePDF) | ISBN 9781118918784 (ePub) | ISBN 9781118918791 (pdf) | ISBN 9781118918784 (epub)

      Subjects: LCSH: Bank liquidity – Management. | Banks and banking – Risk management. | Financial risk management. | BISAC: BUSINESS & ECONOMICS / Banks & Banking.

      Classification: LCC HG1656.A3 V46 2016 (print) | LCC HG1656.A3 (ebook) | DDC 332.1068/1 – dc23

      LC record available at http://lccn.loc.gov/2016001879

      Cover Design: Wiley

      Cover Image: Lost in the middle © iStock.com/3dts

      Chapter 1

      Introduction

      Shyam Venkat and Stephen Baird1

      The global financial crisis began as fears over credit losses and counterparty insolvency eroded market confidence and quickly led to a full-fledged liquidity crisis. As early as August 2007, institutions were seeing a fundamental shift in the liquidity of markets, well before the depth of the mortgage crisis was understood. Today, over eight years later, we stand in the midst of a risk management and regulatory transformation that is touching every aspect of how financial institutions manage their risks and is far from complete. Liquidity risk – one among a very long list of worries for banks, asset managers, regulators, and customers – nevertheless stands apart as it addresses the lifeblood of an institution and liquidity can dry up suddenly if not properly managed. While the credit profile of a loan portfolio can take months or even years to deteriorate, liquidity can disappear in a matter of hours. Liquidity is unpredictable, difficult to measure, and often opaque. In a crisis, market participants are more likely to rely on the media and the rumor mill rather than earnings releases to evaluate the risk of providing liquidity to a trading partner.

      Despite these challenges, or perhaps because of them, and also due to the excess liquidity in the financial markets during much of the 1990s and early 2000s, liquidity risk has in many respects held a lower position on the risk management and regulatory agenda than many other key risk types – particularly credit, market, and overall capital adequacy. As described in the chapters that follow, we believe that industry and regulatory focus is shifting rapidly to liquidity risk, and that banks will need to significantly upgrade their capabilities over the next several years. These improvements will touch every aspect of liquidity risk management – framework design, process management and oversight, and technology capabilities all will need to be upgraded to meet both the demands of the marketplace as well as regulatory expectations. Meeting this challenge successfully will require an agenda, and the principal objective of this book is to suggest the details and approaches to meeting that agenda.

      A Practitioner's Perspective

      The subtitle of this book is “A Practitioner's Perspective.” What is a practitioner's perspective? In our view, practitioners – treasurers and risk managers charged with actually managing and monitoring the bank's liquidity risk – benefit most from information that:

      • Reflects industry practices: The practitioners seek to understand how liquidity risk is managed outside of their institution. Where are other firms ahead of them? Where are they leading the pack?

      • Brings a regulatory perspective: More than ever, the regulatory agenda is shaping the risk agenda. In this environment, understanding what regulators expect – both today and in the future – is an important aspect of building the most effective risk management framework. Arguably though, a well-conceived, robust, and effectively implemented set of liquidity risk management capabilities will generally align with, and even inform, supervisory expectations.

      • Is forward-looking: The practitioner not only lives in the world of what is possible, but also understands the need to keep moving forward. Understanding emerging trends in liquidity risk management is an important aspect for practitioners.

      We