Liquidity Risk

The timely and effective management of liquidity has risen to the very top of the agenda for financial institutions following the industry-wide liquidity contractions experienced through the financial crisis. This has led to significant focus and investment into the re-engineering of liquidity and Asset and Liability Management processes across all levels of institutions.

In undertaking to improve the management of liquidity and optimally price and manage the risks inherent therein, it is also critical to understand and take into account the significant impact of post-crisis regulatory reform which is impacting this area. For example, under the latest round of Basel reforms, there are major implications for the management of liquidity which have been widely reported.  Additionally, the Dodd-Frank and European Market Infrastructure Regulation (EMIR) legislations have wide-ranging liquidity impact arising from such inter-connected elements as the move to central counterparties, collateral eligibility limitations and restrictions upon re-hypothecation.  These all make the process of managing liquidity significantly higher profile.

These developments have also meant that liquidity risk has become increasingly connected to other aspects of institutions’ risk management processes.  For example, the Credit Valuation Adjustment (CVA) process has become entwined with liquidity in many ways such as the implementation of Funding Valuation Adjustment (FVA) models and processes.