The Moorad Choudhry Anthology, + Website

CHAPTER 12Liquidity and Funding: Policy, Management, and Risk Management

“Neil Armstrong seemed more the observer than the participant, but when you looked at his eyes you knew that he was the commander and had all the pieces assembled in his mind. I don't think he ever raised his voice. He just saved his energy for when it was needed.”

—Gene Kranz, Failure Is Not an Option: Mission Control from Mercury to Apollo 13 and Beyond, New York, NY: Berkley Books, 2000

This is a long chapter. But justifiably so. Liquidity management in the banking sector is quite possibly the most important discipline in the entire financial markets industry, and by extension the global economy. When a bank fails there is a significant negative knock‐on effect on society as a whole, and when large banks fail, the impact can be severe indeed, as the events of 2007–2008 demonstrated. The very act of undertaking ordinary bank business creates liquidity and funding risk, and so this risk must be managed competently, and in perpetuity. That's why liquidity management is such a vital issue in finance.

Thankfully, pure liquidity stress events are rare. Historically, more banks have gone bust as a result of credit‐related losses wiping out their capital than have failed because they could not “roll over” their funding requirement when due; in recent history that is because governments (usually in the form of the central bank) generally step in to rescue banks experiencing liquidity problems. That said, the ...