The Principles of Banking

Chapter 13

Liquidity Risk Metrics

One of the principles of bank liquidity management we introduced in the last chapter stated that liquidity risk cannot be represented by a single metric, but rather by an array of metrics. This reflects the fact that the business of liquidity risk, like the wider field of asset–liability management, is as much art as science. It is essential that banks use a range of liquidity measures for risk estimation and forecasting, and deploy the widest variety of tools available in order to produce full and accurate MI.

In some instances banks will not have a choice with regard to the liquidity metrics they report. In the wake of the 2008 crisis, national regulators and the BCBS proposed a consistent set of monitoring metrics for all firms. This was so as to assist supervisors across jurisdictions in looking at the liquidity risk in global banks, and to create a common language for MI, reducing the risk of misinterpretation of information by bank boards and regulators. (This also has the added advantage of reducing systems costs in reporting liquidity risk being run by such entities.) Thus banks can only add to the range of metrics they use, because a benchmark minimum is required under Basel III.

The point of calculating and reporting liquidity risk metrics is to enable senior management to have the most accurate, and up-to-date, estimation of the liquidity exposure of the bank at any time. This assists with planning, but more importantly it enables management ...