Liquidity Risk: Managing Asset and Funding Risks (Finance and Capital Markets Series)

Much critical attention has been given in recent years to market and credit risks, which have a significant effect on corporate and financial operations and must be understood and managed with care. While these areas have rightly received considerable scrutiny, another critical dimension of financial risk - based on corporate liquidity - has been largely overlooked. Liquidity risk is the risk of loss arising from an inability to quickly realise asset value or obtain funding and can be damaging if not properly considered or actively managed. Lack of liquidity can lead to large losses in asset/liability portfolios and off balance sheet activities and in extreme cases can trigger financial distress and insolvency. Liquidity Risk is a comprehensive treatment of the topic focusing on the nature of the risk, problems that arise in asset and funding liquidity and mechanisms that can be developed to monitor, measure and control such risks. Cover......Page 1 Contents......Page 6 List of figures......Page 12 List of tables......Page 14 List of boxes......Page 16 Acknowledgments......Page 18 The author......Page 20 List of acronyms......Page 22 PART I ELEMENTS OF CORPORATE LIQUIDITY......Page 24 Definitions of liquidity risk......Page 26 Liquidity, risk, and the corporation......Page 30 Market risk, credit risk, and liquidity risk......Page 34 Overview of the book......Page 36 Liquidity operating requirements......Page 37 General approaches to liquidity management......Page 40 Financial imperatives......Page 41 External requirements......Page 42 The liquidity risk/return trade-off......Page 43 Liquidity profiles across industries......Page 45 Endogenous versus exogenous liquidity......Page 55 3 Sources of liquidity......Page 59 Sources of asset liquidity......Page 60 Sources of funding liquidity......Page 65 Sources of off-balance sheet liquidity......Page 74 Amalgamating liquidity sources......Page 79 PART II LIQUIDITY PROBLEMS......Page 84 4 Funding liquidity risk......Page 86 Sources of funding liquidity risk......Page 87 Exogenous considerations......Page 94 The nature of funding problems......Page 95 The effects of funding liquidity risk......Page 99 5 Asset liquidity risk......Page 101 Exogenous considerations......Page 104 The nature of asset problems......Page 106 The effects of asset liquidity risk......Page 113 Joint asset and funding risks......Page 115 The liquidity spiral......Page 120 Financial distress......Page 126 7 Case studies in liquidity mismanagement......Page 128 Drexel Burnham Lambert (1990)......Page 129 Askin Capital (1994)......Page 132 Orange County (1994)......Page 134 Long Term Capital Management (1998)......Page 137 General American (1999)......Page 140 Swissair (2001)......Page 142 Enron (2001)......Page 145 PART III MANAGING LIQUIDITY RISKS......Page 150 Common liquidity measures......Page 152 Governance structure......Page 179 Liquidity risk mandate......Page 181 Management duties and responsibilities......Page 184 Liquidity risk controls......Page 185 Other safeguards......Page 202 Liquidity risk monitoring......Page 205 Scope and focus......Page 212 Ex ante market access......Page 215 Defensive measures......Page 216 Communications......Page 220 Invoking and terminating the program......Page 221 Testing the plan......Page 222 11 Summary: toward active liquidity risk management......Page 224 The micro role: best practices......Page 225 The macro role......Page 228 Notes......Page 234 Selected references......Page 246 C......Page 250 F......Page 251 M......Page 252 V......Page 253 Cover 1 Contents 6 List of figures 12 List of tables 14 List of boxes 16 Acknowledgments 18 The author 20 List of acronyms 22 PART I ELEMENTS OF CORPORATE LIQUIDITY 24 1 Liquidity risk defined 26 Definitions of liquidity risk 26 Liquidity, risk, and the corporation 30 Market risk, credit risk, and liquidity risk 34 Overview of the book 36 2 Liquidity and financial operations 37 Liquidity operating requirements 37 General approaches to liquidity management 40 Financial imperatives 41 External requirements 42 The liquidity risk/return trade-off 43 Liquidity profiles across industries 45 Endogenous versus exogenous liquidity 55 3 Sources of liquidity 59 Sources of asset liquidity 60 Sources of funding liquidity 65 Sources of off-balance sheet liquidity 74 Amalgamating liquidity sources 79 PART II LIQUIDITY PROBLEMS 84 4 Funding liquidity risk 86 Sources of funding liquidity risk 87 Exogenous considerations 94 The nature of funding problems 95 The effects of funding liquidity risk 99 5 Asset liquidity risk 101 Sources of asset liquidity risk 104 Exogenous considerations 104 The nature of asset problems 106 The effects of asset liquidity risk 113 6 Liquidity spirals and financial distress 115 Joint asset and funding risks 115 The liquidity spiral 120 Financial distress 126 7 Case studies in liquidity mismanagement 128 Drexel Burnham Lambert (1990) 129 Askin Capital (1994) 132 Orange County (1994) 134 Long Term Capital Management (1998) 137 General American (1999) 140 Swissair (2001) 142 Enron (2001) 145 PART III MANAGING LIQUIDITY RISKS 150 8 Measuring liquidity risk 152 Common liquidity measures 152 9 Controlling liquidity risk 179 Governance structure 179 Liquidity risk mandate 181 Management duties and responsibilities 184 Liquidity risk controls 185 Other safeguards 202 Liquidity risk monitoring 205 10 Liquidity crisis management 212 Scope and focus 212 Ex ante market access 215 Defensive measures 216 Communications 220 Invoking and terminating the program 221 Disaster recovery 222 Testing the plan 222 11 Summary: toward active liquidity risk management 224 The micro role: best practices 225 The macro role 228 Notes 234 Selected references 246 Index 250 A 250 B 250 C 250 D 251 E 251 F 251 G 252 H 252 J 252 L 252 M 252 N 253 O 253 P 253 R 253 S 253 T 253 V 253 Liquidity risk is the risk of loss arising from an inability to quickly realize asset value or obtain funding and can be damaging if not properly considered or actively managed. Lack of liquidity can lead to large losses in asset/liability portfolios and off balance sheet activities and in extreme cases can trigger financial distress and insolvency. Liquidity Risk is a comprehensive treatment of the topic focusing on the nature of the risk, problems that arise in asset and funding liquidity and mechanisms that can be developed to monitor, measure and control such risks. "Much critical attention has been given in recent years to market and credit risks, which have a significant effect on corporate financial operations and must be understood and managed with care. This book is a comprehensive treatment of the topic, focusing on the nature of the risk, problems that arise in asset and funding liquidity, and mechanisms that can be developed to monitor, measure and control such risks."--Jacket Much Critical Attention Has Been Given In Recent Years To Market And Credit Risks, Which Have A Significant Effect On Corporate And Financial Operations And Must Be Understood And Managed With Care. Elements Of Corporate Liquidity -- Liquidity Problems -- Managing Liquidity Risks. Erik Banks. Includes Bibliographical References (pages 223-225) And Index.