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Under this scheme, rural banks contributed a portion of their liquid assets, which the Land Bank of the Philippines (LBP) matched. The funds were invested in high-yielding, risk-free government securities, which can be availed of by member rural banks in the event of liquidity crisis. PDIC also maintained a credit line in case more funds are ...
A position can be hedged against market risk but still entail liquidity risk. This is true in the above credit risk example—the two payments are offsetting, so they entail credit risk but not market risk. Another example is the 1993 Metallgesellschaft debacle. Futures contracts were used to hedge an over-the-counter finance (OTC) obligation.
Liquidity regulations are financial regulations designed to ensure that financial institutions (e.g. banks) have the necessary assets on hand in order to prevent liquidity disruptions due to changing market conditions. This is often related to reserve requirement and capital requirement but focuses on the specific liquidity risk of assets that ...
Asset and liability management (often abbreviated ALM) is the term covering tools and techniques used by a bank or other corporate to minimise exposure to market risk and liquidity risk through holding the optimum combination of assets and liabilities. [1]
Interest rate risk and liquidity risk management are integrated into the credit union's organization and planning to promote sound decisions. Liquidity needs are met through planned funding and controlled uses of funds. Liquidity contingency plans have been established and are expected to be effective in meeting unanticipated funding needs.
Deposit risk is a type of liquidity risk [1] of a financial institution that is generated by deposits either with defined maturity dates (then such deposits are called 'time' or 'term' deposits) [2] or without defined maturity dates (then such deposits are called 'demand' or 'non-maturity' deposits).
This type of risk is particularly relevant for banks since their business model involves funding long-term loans through short-term deposits and other liabilities. The healthy functioning of interbank lending markets can help reduce funding liquidity risk because banks can obtain loans in this market quickly and at little cost.
The possibility that a bank could become unable to settle obligations with immediacy is called Funding Liquidity Risk. Funding liquidity is essentially a binary concept: a bank can either settle obligations or it cannot. Funding liquidity risk, however, can take infinitely many values because it is related to the distribution of future outcomes.