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Liquidity Risk is pervasive in financial markets, from simple treasury funding risks (so called Funding Risk), to asset and liability (ALM) liquidity (so called Market Liquidity Risk) through to derivatives pricing and hedging (so called Model or Hedging Risks). All are critically dependent on liquidity and its risks. From the bank run on Northern Rock, to the collapse of Lehman, liquidity risk played a key role. Central Banks continue to pump liquidity via QE and TARP, whilst attempting to manage liquidity risks on a massive scale. The understanding of liquidity and its risks in its various guises is key to anyone with a role in running a financial institution. This course is specifically designed to guide delegates through the identification, measurement and control of liquidity risk.
The course examines the sources of liquidity risk in typical balance sheets, notably banks and insurance companies. This will allow the delegate to fully understand how it arises and how it can manifest itself most brutally in default or bank run. The course then analyses quantitative methods for measuring liquidity risk in difference contexts such as treasury, balance sheet and derivatives valuation and hedging. Quantitative models and adaptations to common approaches such as VaR and expected short fall, are discussed to incorporate Liquidity Risk. Practical management techniques and strategies are also covered, along with the Basel III regulatory requirements in respect of LCR and NSFR. Market oriented examples are given throughout – to give participants insight into practical liquidity risk management techniques in the current environment.
The fundamentals of a liquidity risk management framework are presented in the context of contemporary regulatory requirements and firm-wide liquidity management techniques are considered. The course discusses the effects of liquidity squeezes and the availability of risk capital on the broad market. You will cover:
- The effects of liquidity risk on securities pricing and funding
- The relationship to Funds Transfer Pricing (FTP)
- The impact on derivative pricing and hedging
- The challenges of building a successful framework for liquidity risk management
- The regulatory requirements for liquidity including Basel stress tests
- Effective liquidity stress testing and contingency planning
- The techniques for modelling liquidity risk within a treasury framework
- The impact of liquidity in the failure of LTCM hedge fund
- The role of liquidity risk in the downfall of a major Wall Street firm
How You Will Learn
Our experienced trainer uses exercises to bring the theory to life
Computer-based exercises include: Modelling the impact of liquidity risk on securities/derivatives prices; Designing Liquidity Stress Tests
Case studies include: Liquidity risk in the failure of long-term capital management; Liquidity risk and Lehman Brothers – how LR brought down a major Wall Street firm