CHAPTER 21
Liquidity Risk and Value Creation
In Chapter 4, it was stated that two of the five main functions of a bank are to lend money to mitigate problems of asymmetrical information and to provide insurance. One type of insurance is liquidity insurance, ensuring that depositors or borrowers are able to withdraw money on demand. This chapter first discusses the measurement and management of liquidity risk. Next, it clarifies the debate on the value creation resulting from selling liquidity insurance.
LIQUIDITY RISK: MEASUREMENT AND MANAGEMENT
Liquidity risk for a bank arises because cash withdrawals cannot be met at low cost by a fire sale ...
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