Liquidity Risk Management in Banks by Roberto Ruozi & Pierpaolo Ferrari

Author:Roberto Ruozi & Pierpaolo Ferrari
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg

Under the liquidity coverage standard, a bank must hold a stock of unencumbered high-quality liquid assets to fill funding gaps between cash outflows and cash inflows over a 30-day stress period and as a defence against the potential onset of severe liquidity stress.

In order to be included in high-quality liquid assets, instruments should be easily and immediately converted into cash at little or no loss of value and, ideally, be eligible for central banks’ standing facilities. The main features of high-quality liquid assets are: low market and credit risk, ease and certainty of valuation, low correlation with risky assets and listing on a recognized market. These characteristics ensure that they can be converted into cash even in conditions of idiosyncratic and market stress.

The stock of high-quality liquid assets held by a bank is obtained by multiplying on-balance sheet accounting values by a factor set at international level, taking into account the quality of each category of assets. There are two categories of assets that can be included in the amount of high-quality liquid assets:“Level 1” assets can be included without limit and qualify for a 100 % factor. These assets include cash, qualifying central bank reserves, qualifying marketable securities from sovereigns, central banks, public sector entities and multilateral development banks, domestic sovereign or central bank debt securities in domestic currency and also in foreign currency to the extent they match bank liquidity needs in that jurisdiction;

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