Managing Liquidity in Banks – A Top Down Approach A top down approach

'Liquidity risk is a topic growing immensely in importance in risk management. It has been much neglected by financial institutions and regulators in recent years and receives, in the course of the sub-prime crisis, sudden and great attention. This book is well-structured and provides a comprehensive and systematic approach to the topic. It will help risk controllers to systematically set up a liquidity risk framework in their bank.' - Peter NEU, European Risk Team Leader, The Boston Consulting Group, and co author of Liquidity Risk Measurement and Management.

'Mr Duttweiler's book is a welcome addition to the literature on liquidity risk measurement and management. In addition to his contributions to liquidity risk theory and liquidity pricing, the author provides a good overview of all of the critical elements.' - Leonard Matz, International Solution Manager, Liquidity Risk and co-author of Liquidity Risk Measurement and Management.

Liquidity Risk Management has gained importance over recent years and particularly in the last year, as major bank failures have led to a re-evaluation of the significance of liquidity in stressed market conditions. Liquidity risk is closely related to market risk and solvency, suggesting its significance in times of volatile and 'bear' markets, where a single bank's failure can have dramatic effects on market liquidity.

The term liquidity is not well-define, and a comprehensive understanding of its common elements is often missing within a banking organisation. In too many cases, liquidity risk management has not been developed with a coherent framework and generally accepted terms and methods, creating weaknesses in its structure and vulnerability to market risk. In this title, Duttweiler advances the study of quantitative liquidity risk management with the concept of the 'Liquidity Balance Sheet', which allocates portfolios into a specific structure, and consequently is able to account for potentially negative surprises so that the necessary buffers can be quantified.

The book begins with an overview of liquidity as part of financial policy and highlights the importance of liquidity as part of a general business concept and as protector and supporter of a business as a going concern. The author examines the role o liquidity in helping managers to achieve high-level liquidity aims to support operating units to achieve business goals. He looks at quantitative methods of assessing a banks liquidity levels, including LaR and VaR, to establish an integrated concept in which liquidity is incorporated into the framework of financial policies. He also presents methods, tools, scenarios and concepts to create a policy framework for liquidity and to support contingency planning.

This book is a practical reference which will enable senior managers within banks and other organizations to develop a business framework which takes into account liquidity risk at every level of the organization which includes liquidity risk.  Liquidity risk is in the limelight as rarely before, however even recently published books on liquidity emphasize the management aspects and largely neglect a simple fact: under severe liquidity stress, a bank is challenged in many ways and on different levels.  Simply focusing on liquidity management at business unit or product level does not take these aspects into sufficient consideration. This book addresses this by showing how the whole business must and can be protected by creating a financial policy and liquidity framework which protects the organization from liquidity risk at all levels with a top down approach. Section 1: An introduction to Liquidity Risk and interrelated risks such as solvency, interest rate risk etc. are explained and the relationship and its difference respectively discussed.           Section 2: Creating a business framework which can include liquidity policy. This section also shows the interrelationship between liquidity and other aspects of the business.   Section 3: Defining Liquidity policy in your organization. This section addresses limit setting, defining stressed conditions and reporting. The section concludes with the necessary elements of building a contingency plan. As banks are not easily comparable, there will be a set of possible solutions that can be applied according to the specific circumstances of the individual bank. Section 4 : The impact of various forms of stress are shown and the liquidity balance-sheet is developed and  the key risk areas are defined. Simple mathematical concepts and modelling techniques are explained and the author then shows how to measure and quantify the risk through these techniques.   Section 5: The case of Commerzbank under stress in late 2002 is presented to show the workings of a bank under real conditions of stress.  The case study shows which measures and actions were successful or not and why.  

Foreword Preface Acknowledgements About the Author 1 Liquidity and Risk: Some Basics 1.1 Some understanding of liquidity 1.2 The meaning of liquidity risk 2 Liquidity in the Context of Business and Financial Policy 2.1 Introduction 2.2 Equilibrium as a tool within financial policy 2.3 The concept enlarged to fit banks 3 Liquidity as an Element of Banking Risk 3.1 Some clarifications 3.2 The concept of downside risk (VAR) and its circle of relationships 3.3 LAR: liquidity risk and the missing theoretical concept 3.4 An attempt at an integrated concept for LAR 3.5 Summary 4 A Policy Framework for Liquidity 4.1 Some thoughts and considerations 4.2 An overview of elements regarding liquidity policy 4.3 The elements of a liquidity policy in detail 4.4 Contingency planning 4.5 A technical frame supporting liquidity policy 4.6 The link to liquidity management 5 Conceptual Considerations on Liquidity Management 5.1 Introduction 5.2 From accounting presentation to defining the liquidity balance sheet 5.3 The liquidity balance sheet and liquidity flows 6 Quantitative Aspects of Liquidity Management 6.1 General consideration 6.2 Liquidity at risk as one determinant of the buffer 6.3 Defining and quantifying the buffers 6.4 Limit-related input for liquidity policy 6.5 Transfer pricing and an alternative concept 7 The Concept in Practice 7.1 Introduction 7.2 Establishing the base 7.3 Case 1: a shock event (9/11) 7.4 Case 2: a name-related stress (Commerzbank in autumn 2002) 7.5 Subprime crisis: a stress in progress 7.6 Final remarks and consideration 8 Acting Within the Supervisory Framework 8.1 High-level risks 8.2 The regulatory focus set by supervisors 8.3 Considerations and conclusions for bank management Bibliography Index