Liquidity Management: A Funding Risk Handbook

CHAPTER 1 Funding and Market Liquidity

We introduce funding liquidity risk in this first chapter and the stance of some regulators on the controls expected. The first section highlights some facts, events and changes in market conditions that have increased the importance of this risk type, so relevant in recent years. It should also provide an overview of the challenges that banks' treasury functions will face and will suggest how a financial institution could address and possibly manage them, in particular when one is experiencing stressed, difficult market conditions. The second section presents some indications on the management of liquidity funding risk, based on the author's experience and lessons learnt. The third and longest section describes and comments on regulatory frameworks – focusing on the International Basel Committee, EBA, PRA, USA FED – on liquidity and funding liquidity requirements and indications.

1.1 LIQUIDITY IN THE FINANCIAL MARKETS

Like seatides going up and down, the financial markets history shows a recurrence of events and conditions can be seen as recursive. Further, we can see that something influential at times of abundance becomes suddenly crucial and pricey under other market conditions that are stable, and prices that are reliable when the tide goes out could then change substantially as it comes in. So it was, for example, in the money markets and interbank lending, with the exchange of deposits and funds amongst banks and companies, ...