The Liquidity Risk Management Guide: From Policy to Pitfalls

9 Step IV: The Quantitative Framework

The fourth step of the ‘6 Step Framework’ is the quantitative liquidity risk framework. Liquidity risk, like any other field within risk management, relies on various quantitative measures. This is sometimes stamped as ‘liquidity risk management’, which should not be confused with the general task of managing liquidity, which is a tactical function undertaken by the treasury division. The chapter covers first and foremost the systems and processes for identifying, measuring and monitoring liquidity risk.

This part of the ‘6 Step Framework’ is an integrated part of the framework. By defining the Sources of Liquidity Risk (the first step), it has established what specifically is to be measured while keeping in mind measurements and metrics that need to be tailored to the bank's risk profile. Included in this quantitative framework is the cash flow analysis platform, which is used in the scenario stress testing in the next step, Step V. Furthermore, many of the metrics defined and used are also included in the Contingency Funding Plan, also in Step V, in the form of early warning indicators (EWIs). Both the balance sheet metrics and cash flow forecasts (through stress testing) provide the limits used when setting the risk tolerance in Step II, so it can be concluded that the quantitative framework is a key factor in the ‘6 Step Framework’ and is well integrated.

9.1 DIFFERENT WAYS TO MEASURE LIQUIDITY

There are a few different methods used ...