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Financial Institutions & Management Chapter 15
Financial Institutions & Management Chapter 15
Financial Institutions & Management Chapter 15
Liquidity Risk
Overview
This chapter explores the problems created
by liquidity risk.
Liquidity risk is a normal aspect of the
everyday management of a DI.
Only in limited cases does liquidity risk
threaten the solvency of a DI.
We discuss the causes of liquidity risk,
methods of measuring liquidity risk, and its
consequences.
The chapter also discusses the regulatory
mechanisms put in place to control liquidity
risk.
Copyright 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Financial Institutions Management 2e, by Lange, Saunders, Anderson, Thomson and Cornett
Slides prepared by Maike Sundmacher
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Asset side:
Borrowers decide to use the loan commitment facilities
provided by the DI.
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Managing Liquidity
Two major ways to manage drains on deposits or
exercise of loan commitments:
Purchased liquidity management, and/or
Stored liquidity management.
Traditionally, DIs have relied on stored liquidity
management.
Today, most DIs rely on purchased liquidity
management.
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Pi
I Wi *
i 1
Pi
N
Where:
Wi = the per cent of each asset in the DIs portfolio
Pi = the immediate sales price
Pi* = the fair market price.
Copyright 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Financial Institutions Management 2e, by Lange, Saunders, Anderson, Thomson and Cornett
Slides prepared by Maike Sundmacher
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P*1 = 1.00
P2 = 0.82
P*2 = 0.93
W1 = 0.4
W2 = 0.6
0.98
0.82
I 0.4 *
0 .6 *
0.392 0.529 0.921
1.00
0.93
Copyright 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Financial Institutions Management 2e, by Lange, Saunders, Anderson, Thomson and Cornett
Slides prepared by Maike Sundmacher
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Web Resources
For further information on the BIS maturity ladder
approach, visit the Bank for International Settlements:
www.bis.org
For information on prudential
standards for liquidity measurement and
management in Australia, visit APRA:
www.apra.gov.au
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Liquidity Planning
The overall aim of successful liquidity planning is to
ensure that there will be sufficient funds to settle
outflows as they become due.
Liquidity falls into a number of different categories:
Immediate liquidity obligations.
Seasonal short-term liquidity needs.
Trend liquidity needs.
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Liquidity Planning
Immediate liquidity obligations:
Occur in contractual and relationship form.
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Responsibility of RBA.
Defined as the absence of financial crises that are
sufficiently severe to threaten the health of the
economy.
Financial crises are costly, e.g. Asian financial crisis
in 1997/1998.
RBAs responsibility to implement policies that
prevent financial instability.
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Financial Institution
Instability: Australia the 1990s
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Financial Institution
Instability: Australia the 2000s
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Managed Funds
Closed-end funds:
Sell a fixed number of shares in the fund to outside
investors.
Open-end funds:
Sell an elastic (non-fixed) number of shares in the fund to
outside investors.
Must stand ready to buy back issued shares at current
market prices.
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