34 years: Banking and Capital Markets
Effective liquidity risk management is imperative for any bank that wishes to continue in business on a sustained basis. Here, Moorad introduces the concept of liquidity risk and the principles of sound liquidity management before considering more technical details and regulatory requirements.
Effective liquidity risk management is imperative for any bank that wishes to continue in business on a sustained basis. Here, Moorad introduces the concept of liquidity risk and the principles of sound liquidity management before considering more technical details and regulatory requirements.
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19 mins 44 secs
Liquidity risk management is the ability of a bank to meet obligations when they become due. Liquidity management is dictated from the highest level and it influences every aspect of the business strategy and operating model. The nine principles of liquidity risk are the general benchmarkers of banking liquidity risk management and include maintaining a liquidity buffer and diversifying funding sources to name a few.
Key learning objectives:
Define liquidity risk management
Understand the elements of managing liquidity risk
Know the 9 principles of liquidity risk
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The central tenet of the principles of banking is that of liquidity risk management; therefore by definition it should be part of the strategy of every bank to be able to survive a liquidity crisis. Liquidity management is the most important risk management function in banking, at the individual bank level and at the aggregate industry level.
In banking, liquidity is the ability to meet obligations when they become due. In other words, maintenance of liquidity at all times is the paramount order of banking. Banks need to set in place an infrastructure and management ability to ensure that liquidity is always available, to cover for all times when market conditions deteriorate. Because banks are so important to the economy’s health, central banks operate as “lenders of last resort” to come to the aid of a bank that finds itself in liquidity difficulties.
The importance of liquidity risk management is such that it must be addressed at the highest level of a bank’s management, which is the Board of Directors. Liquidity management is devised and dictated from the highest level, and influences every aspect of the bank’s business strategy and operating model.
Liquidity crises are endemic in banking and finance. That is why it is essential to maintain liquidity principles throughout the economic cycle, a discipline that may break down during a bull market or a period of cheap and plentiful cash availability. The majority of banks do adhere to sound principles of liquidity management during a bull market, when funds are readily available, but some do not. Sound liquidity management is to the benefit of the bank’s shareholders and all its stakeholders.
The following represent basic essential management standards of banking. We consider these to be the most important principles of what should be taken to be the cornerstone of banking and liquidity risk management.
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