Liquidity Risk
Ensuring continuous availability of funds to meet obligations without incurring unacceptable losses or capital erosion.
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The Dual Nature of Liquidity
1. Funding Liquidity
Risk arising from a bank's inability to obtain funds to meet cash-flow obligations at the due date. A failure of resource mobilization.
2. Market Liquidity
Inability to conclude large transactions near current market prices due to lack of market depth or systemic freeze.
Case Study: Barings Bank
Combined risk effects forced a severe liquidity crisis. The institution could not meet exchange margin calls, leading to collapse after $1.1B in unmonitored dealer losses.
Short Term Liquidity Framework
Strategic focus on shocks disrupting orderly funding, typically spanning from Overnight to 3 Months.
Dynamic Worksheets
Daily treasury preparation for executive ALCO (Asset Liability Committee) review.
Source Diversification
Identification and mapping of institutional short-term investor pools.
Asset Liquidity
Catenating unencumbered securities for Repo and refinance operations.
Critical Monitoring Ratios
Long Term Strategy
Focus on Credit Deterioration and Maturity Mismatches (funding long-term projects with volatile short-term sources).
The Euro-Funding Trap:
Frequent in offshore finance where projects default, leaving roll-over obligations entirely on the bank. This leads to principal ballooning during currency devaluations.
The ALM Imperative
Survival depends on the bank's ability to raise funds *without* sacrificing net interest income or eroding its core capital base.