Liquidity Risk Management and Cross Currency Funding Risks with Dr. Robert Fiedler

Monday, May 20

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30

Session 1: Liquidity Risk in General

Key Concepts
  • Insolvency (illiquidity and over-indebtedness)
  • Illiquidity risk & liquidity induced value / earnings risks
  • Payments, loro and nostro accounts, cash flows and balances
Measuring Illiquidity Risk
  • Building a liquidity balance sheet from a complete set of transactions
  • Future payments, flows and cash inventories (stock and flow)
  • Forecasting the bank's future nostro balance: Projected Liquidity Exposure (PLE)
  • The substitute of capital for liquidity purposes: CounterBalancing Capacity (CBC)
  • Net Liquidity Exposure NLP=PLE+CBC

12.30 - 13.30 Lunch

13.30 - 17.00

Session 2: Refined Liquidity Risk Issues

  • What is a scenario?
  • Generation of contracts / transactions / payments (cash flows)
  • Liquidity options, dependency from market values and counterparty decisions
  • Scenario liquidity units
  • Stochastic Concepts (Liquidity-at-Risk, Cash-Flow-at-Risk, Value-Liquidity-at-Risk)
Liquidity Generating Strategies
  • Exposures and Strategies
  • Contingency funding and the need for liquidity generation
  • Term-structures: Ownership, Possession and Encumbrance of Assets
  • Forward Asset Flows (FAF) and Inventories (FAI)
  • Liquification by Sale and Repo
  • Eligibility and Liquification Venues
  • The Liquifiability Index (LiX)
Liquid Assets
  • Characteristics of liquid assets
  • Eligibility: availability for the anticipated liquification process
    • encumberedness of assets
    • liquification venues
  • Possession and ownership in time: The Forward Asset Inventory
  • Classification of liquifiability: The LiX of an asset
The CounterBalancing Capacity (CBC)
  • Liquification classes, haircuts, value decays and upper limits
  • The liquification algorithm and its parameters
  • Scenarios for the CounterBalancing Capacity CBC
  • Related Liquidity Generation concepts:
    Liquidity Buffer, Day-Count-to-Default, Liquidity Barometer, Survival Horizon

Session 3: The Cost of Liquidity

  • Basics of transfer pricing
  • 'Riding the Yield Curve'
  • Costs of funding, interest, liquidity
  • 'Matched Funding' (congruent replication) and the role of treasury
  • Expected and unexpected risks, the role of PLE and CBC

Tuesday, May 21

09.00 - 12.30

Session 4: Intraday Liquidity Risk (ILR)

Typical Issues
  • Relationship between cash and liquidity (risk) management
  • Direct and indirect payments vs. cash flows
  • Case study: Fortis and Dexia in the 2008 crisis
  • Settlement systems (RTGS / End of Day)
  • Active and passive credit risk in the payment process
  • Forecasting and back-testing of payments
  • Case Study 'Herstatt-Risk'
  • CLS (Continuously Linked Settlement)
  • Time-critical payments
  • Stop of payments and cease of payments
ILR - Regulatory Requirements
  • BCBS - Monitoring Tools for Intraday Liquidity Management
  • Liquidity Risk Management and Liquidity Management
  • Definitions: intraday liquidity sources / usage
  • The seven intraday monitoring tools
  • Detailed design of the intraday liquidity monitoring tools
  • Intraday liquidity stress scenarios
  • Scope of application of the tools
  • Implementation date and reporting frequency
  • Example: derivation of the regulatory reporting
Integration of Intraday Issues into Liquidity Risk Methods
  • Time delay between liquidity risk origination and realization
  • Refinement of the term structure / local minimums
  • Mitigation / usage of liquidity buffers
  • The role of collateral - possession and ownership
  • How late can we pay: game theory between optimization of liquid funds and chaos
  • Near-illiquidity situations and reactions
Stochastic Intraday Simulation
  • Intraday stress scenarios (BCBS 248) derived from historic intraday monitoring data
    Does this make sense? Do we really measure (intraday) liquidity risk?
  • The idea of stochastic intraday simulation: planned outflows / stochastic inflows
  • Modelisation of flows and implementation of payment algorithm
  • Implementation of (stochastic) stress scenarios
  • Interpretation of results - where is the liquidity risk?
  • Intraday time-value of payments
  • Intraday time risk measures as measures for ILR

12.30 - 13.30 Lunch

13.30 - 17.00

Session 5: Cross-Currency Liquidity Risks

  • Problem: total surpluses (in currencies) outweigh total deficits - but can the bank translate the funds between currencies?
  • Case study: USD short squeeze during the 2008 crisis
FX Liquidity Risks
  • FX-induced liquidity cost risks
  • Intraday payments risks
  • Cross-currency illiquidity risk
  • The Projected Liquidity Exposure (PLE) in multiple currencies
    • 'consolidation' across currencies
    • scenario dependency of the PLE
      • market variability
      • the bank's short optionality
FX Translations in a Business-as-Usual Regime
  • Do we translate cash flows or future balances between currencies?
  • From full FX squaring to latest possible interventions
  • Repeated pointwise FX zeroing
  • The cost of FX squaring
Potential FX-Translation Restrictions
  • Transaction between legal entities (net lending restrictions)
  • Local legal constraints (minimum liquidity requirements)
  • Operational / legal restraints
The FX Translation Capacity (FTC)
  • The bank's long optionality
  • Role of the central banks
  • Use of liquid assets (in multiple currencies)
  • The FX Swaps market
  • Measuring the bank's ability to square cross currency deficits
  • Influencing factors (risk drivers) of the FTC
    • idiosyncratic risk (the bank's probability of default)
    • the counterparty's exposure at default
  • Forms of Wrong-Way-Risk
Managing Cross-Currency (Il-)liquidity Risks
  • Capturing liquidity-induced loss risks with synthetic bid/offer-spreads
  • Reporting, monitoring and limiting the PLE with the FTC
  • Underlying FX-specific scenarios
  • Statistical estimation of the bank's FTC
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