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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]
Relatedly, [30] liquidity risk is monitored: LCR, the Liquidity Coverage Ratio, measures the ability of the bank to survive a short-term stress, covering its total net cash outflows over the next 30 days with "high quality liquid assets"; NSFR, the Net Stable Funding Ratio, assesses its ability to finance assets and commitments within a year ...
This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). There are two types of liquidity risk: Asset liquidity – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk. This can be accounted for by:
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 risk is the risk of not being able to efficiently meet present and future cash flow needs without adversely affecting daily operations. Liquidity is evaluated on the basis of the credit union's ability to meet its present and anticipated cash flow needs, such as, funding loan demand, share withdrawals, and the payment of liabilities ...
Ultimately, the bank that sticks to what it does best is the best at avoiding risk. Stay tuned as we continue to dig into U.S. Bancorp on our journey to better understand banks. More Foolish ...
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.