The Principles of Banking, 2nd Edition

CHAPTER 12Liquidity Risk Metrics¹

Abstract

Liquidity risk exposure cannot be measured by a single specific metric, hence banks should employ a suite of proxy indicators, which taken together will provide a reasonable measure of the extent of liquidity risk extant in the bank. The larger and more sophisticated the balance sheet structure, the more likely it is that the suite of metrics will be a large one. The chapter presents the universal metrics that are relevant to all banking institutions around the world.

One of the principles of bank liquidity management we introduced in the last chapter was 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.

Two metrics are universal at every bank in the world and must be reported, these being the LCR and NSFR introduced by the BCBS. These assist supervisors across jurisdictions in looking at the liquidity risk in global banks, and create a common language for MI, reducing the risk of misinterpretation of information by bank boards and regulators. Thus banks can only add to the range of metrics they use, because a benchmark minimum is required under Basel III.

The point ...