A two-day practical and comprehensive course on measuring, modelling and managing of liquidity risk in a post-crisis regulatory landscape.
The purpose of this course is to give you a comprehensive understanding of methods and tools for modelling, measuring and managing liquidity risk with particular focus on the challenges posed by the new Basel III liquidity ratios.
We start with a review of the events and that have lead to the realisation of the need for strongly improved liquidity risk management practices. We explain regulatory responses which include the introduction of new liquidity ratios (LCR and NSFR), rigorous stress testing requirements, and heightened reporting standards. We also discuss the possible business impacts of these changes.
We then explain methods for measuring and monitoring liquidity risk under the Basel III regulatory regime. We explain and demonstrate how cash flows arising from assets, liabilities and off-balance sheet items can be projected over various time horizons and under different stress assumptions. We thoroughly explain the Basel III liquidity ratios, LCR and NSFR, and we explain and demonstrate how these ratios can be calculated, implemented, reported and disclosed. We also discuss how banks can best prepare for the NSFR, which will become an effective requirement in 2018. Importantly, we discuss how this ratio will impact banks' funding and trading business.
Further, we discuss the importance of liquidity risk as a source of market risk. We propose a method for measuring market liquidity risk that is consistent with the VaR approaches underlying Basel III and we explain the concept of "liquidity horizons" under the proposed revised treatment of trading book risk.
Further, we explain how stress testing can be used as a tool in developing a complete picture of an institution's liquidity risk profile. We give an overview of best practices in liquidity stress testing, and we explain and demonstrate how stress testing techniques are used in conjunction with the calculation of the LCR. We also explain how macro-economic stress testing is used by regulators and/or central banks to gauge the financial system's vulnerability to liquidity shocks.
Finally, we explain how liquidity risk can effectively managed under the new regulatory regime. We discuss possible changes to banks' business models to cope with the LCR and NSFR challenges, and we present a number of liquidity management tools, including "contingency planning" and financing instruments. We also explain how liquidity risk should be priced consistently and how FTP can be used as a tool to promote optimal use of liquidity under the LCR/NSFR regime.