1) Liquidity Risk Management Analysis of liquidity risk involves the measurement of not only the liquidity position of the bank on an ongoing basis but also examining how funding requirements are likely to be affected under crisis scenarios. Net funding requirements are determined by analyzing the bank’s future cash flows based on assumptions of the future behavior of assets and liabilities that are classified into specified time buckets and then calculating the cumulative net flows over the time frame for liquidity assessment. Future cash flows are to be analysed under “what if” scenarios so as to assess any significant positive / negative liquidity swings that could occur on a day-to-day basis and under bank specific and general market crisis scenarios. Factors to be taken into consideration while determining liquidity of the bank’s future stock of assets and liabilities include their potential marketability, the extent to which maturing assets /liability will be renewed, the acquisition of new assets / liability and the normal growth in asset / liability accounts. Factors affecting the liquidity of assets and liabilities of the bank cannot always be forecast with precision. Hence they need to be reviewed frequently to determine their continuing validity, especially given the rapidity of change in financial markets. The liquidity risk in banks manifest in different dimensions: (a) Funding Risk – need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits (wholesale and retail); (b) Time Risk – need to compensate for non-receipt of expected inflows of funds, i.e. performing assets turning into non-performing assets; and (c) Call Risk – due to crystallisation of contingent liabilities and unable to undertake profitable business opportunities when desirable. for more details click on: on.fb.me/1cHnpJO
Posted on: Fri, 27 Jun 2014 17:56:42 +0000
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