Liquidity Risk Management and Cross Currency Funding Risks with Dr. Robert Fiedler

Agenda Program
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Prague, NH Hotel Prague
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Learn from the best practice within leading international banks
Identify the nature of liquidity risk and how to distinguish its different types
Develop an economic methodology to measure, monitor and manage illiquidity risk
Learn to model liquidity risk exposures and their mitigating strategies
Understand, implement and learn how to manage the impacts of regulatory liquidity related requirements such as Basel III, BCBS 248, CEBS' Guidelines on Liquidity Cost Benefit Allocation
Understand the role of liquidity risk in the bank's transfer pricing process and quantify its direct and indirect costs
Introduction to the course
Liquidity Risk has always been the ultimate risk for financial institution, although in times of financial stability ongoing growth and ample cash liquidity supply between banks, it has not been at the forefront of perception. Other than market and credit risk, and even operational risk, its methods have not been that far developed and moreover, regulators have been a bit reluctant to explicitly deal with it. During the Financial Crisis 2007-2008, however, esteemed institutions like Lehman Brothers, Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Fortis, Dexia, Hypo Real Estate etc. became unable to raise sufficient cash for the ordinary course of their business and went into bacruptcy or had to be saved by their governments. This completely changed the picture: the top banks have developed and implemented sophisticated liquidity methodologies and the regulators followed with according standards (Basel 3). After this course the attendants will understand the roots of liquidity risk and it effects their business model. They will be able to distinguish economic and regulatory measures for liquidity risk and learn how to optimize their balance sheet accordingly.

Learning format
Class room teaching with the possibility of question and answers as well as joint discussion of case studies.

Who should attend?
CEOs, CFOs, CROs, MDs, VPs, Directors, Division Heads, Senior Managers and Executives responsible for:
  • Liquidity Management / Liquidity Risk Management / Liquidity Transfer Pricing
  • Treasury / ALM / Money Markets / Repo Trading / ALM Risk
  • Balance Sheet Management / Business Planning
  • Funds Transfer Pricing / Origination
  • Risk Management / Model Risk
  • Finance and Accounting
  • Auditors (Internal & External)

Program of the seminar: Liquidity Risk Management and Cross Currency Funding Risks with Dr. Robert Fiedler

The seminar timetable follows Central European Time (CET).

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30

Session 1: Liquidity Risk in General

Key Concepts
  • Insolvency (illiquidity and over-indebtedness)
  • Illiquidity risk & liquidity induced value / earnings risks
  • Payments, loro and nostro accounts, cash flows and balances
Measuring Illiquidity Risk
  • Building a liquidity balance sheet from a complete set of transactions
  • Future payments, flows and cash inventories (stock and flow)
  • Forecasting the bank's future nostro balance: Projected Liquidity Exposure (PLE)
  • The substitute of capital for liquidity purposes: CounterBalancing Capacity (CBC)
  • Net Liquidity Exposure NLP=PLE+CBC

12.30 - 13.30 Lunch

13.30 - 17.00

Session 2: Refined Liquidity Risk Issues

  • What is a scenario?
  • Generation of contracts / transactions / payments (cash flows)
  • Liquidity options, dependency from market values and counterparty decisions
  • Scenario liquidity units
  • Stochastic Concepts (Liquidity-at-Risk, Cash-Flow-at-Risk, Value-Liquidity-at-Risk)
Liquidity Generating Strategies
  • Exposures and Strategies
  • Contingency funding and the need for liquidity generation
  • Term-structures: Ownership, Possession and Encumbrance of Assets
  • Forward Asset Flows (FAF) and Inventories (FAI)
  • Liquification by Sale and Repo
  • Eligibility and Liquification Venues
  • The Liquifiability Index (LiX)
Liquid Assets
  • Characteristics of liquid assets
  • Eligibility: availability for the anticipated liquification process
    • encumberedness of assets
    • liquification venues
  • Possession and ownership in time: The Forward Asset Inventory
  • Classification of liquifiability: The LiX of an asset
The CounterBalancing Capacity (CBC)
  • Liquification classes, haircuts, value decays and upper limits
  • The liquification algorithm and its parameters
  • Scenarios for the CounterBalancing Capacity CBC
  • Related Liquidity Generation concepts:
    Liquidity Buffer, Day-Count-to-Default, Liquidity Barometer, Survival Horizon

Session 3: The Cost of Liquidity

  • Basics of transfer pricing
  • 'Riding the Yield Curve'
  • Costs of funding, interest, liquidity
  • 'Matched Funding' (congruent replication) and the role of treasury
  • Expected and unexpected risks, the role of PLE and CBC

09.00 - 12.30

Session 4: Intraday Liquidity Risk (ILR)

Typical Issues
  • Relationship between cash and liquidity (risk) management
  • Direct and indirect payments vs. cash flows
  • Case study: Fortis and Dexia in the 2008 crisis
  • Settlement systems (RTGS / End of Day)
  • Active and passive credit risk in the payment process
  • Forecasting and back-testing of payments
  • Case Study 'Herstatt-Risk'
  • CLS (Continuously Linked Settlement)
  • Time-critical payments
  • Stop of payments and cease of payments
ILR - Regulatory Requirements
  • BCBS - Monitoring Tools for Intraday Liquidity Management
  • Liquidity Risk Management and Liquidity Management
  • Definitions: intraday liquidity sources / usage
  • The seven intraday monitoring tools
  • Detailed design of the intraday liquidity monitoring tools
  • Intraday liquidity stress scenarios
  • Scope of application of the tools
  • Implementation date and reporting frequency
  • Example: derivation of the regulatory reporting
Integration of Intraday Issues into Liquidity Risk Methods
  • Time delay between liquidity risk origination and realization
  • Refinement of the term structure / local minimums
  • Mitigation / usage of liquidity buffers
  • The role of collateral - possession and ownership
  • How late can we pay: game theory between optimization of liquid funds and chaos
  • Near-illiquidity situations and reactions
Stochastic Intraday Simulation
  • Intraday stress scenarios (BCBS 248) derived from historic intraday monitoring data
    Does this make sense? Do we really measure (intraday) liquidity risk?
  • The idea of stochastic intraday simulation: planned outflows / stochastic inflows
  • Modelisation of flows and implementation of payment algorithm
  • Implementation of (stochastic) stress scenarios
  • Interpretation of results - where is the liquidity risk?
  • Intraday time-value of payments
  • Intraday time risk measures as measures for ILR

12.30 - 13.30 Lunch

13.30 - 17.00

Session 5: Cross-Currency Liquidity Risks

  • Problem: total surpluses (in currencies) outweigh total deficits - but can the bank translate the funds between currencies?
  • Case study: USD short squeeze during the 2008 crisis
FX Liquidity Risks
  • FX-induced liquidity cost risks
  • Intraday payments risks
  • Cross-currency illiquidity risk
  • The Projected Liquidity Exposure (PLE) in multiple currencies
    • 'consolidation' across currencies
    • scenario dependency of the PLE
      • market variability
      • the bank's short optionality
FX Translations in a Business-as-Usual Regime
  • Do we translate cash flows or future balances between currencies?
  • From full FX squaring to latest possible interventions
  • Repeated pointwise FX zeroing
  • The cost of FX squaring
Potential FX-Translation Restrictions
  • Transaction between legal entities (net lending restrictions)
  • Local legal constraints (minimum liquidity requirements)
  • Operational / legal restraints
The FX Translation Capacity (FTC)
  • The bank's long optionality
  • Role of the central banks
  • Use of liquid assets (in multiple currencies)
  • The FX Swaps market
  • Measuring the bank's ability to square cross currency deficits
  • Influencing factors (risk drivers) of the FTC
    • idiosyncratic risk (the bank's probability of default)
    • the counterparty's exposure at default
  • Forms of Wrong-Way-Risk
Managing Cross-Currency (Il-)liquidity Risks
  • Capturing liquidity-induced loss risks with synthetic bid/offer-spreads
  • Reporting, monitoring and limiting the PLE with the FTC
  • Underlying FX-specific scenarios
  • Statistical estimation of the bank's FTC

Training catalogue in PDF
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