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Elizabeth Lumley
Elizabeth Lumley - Girl, Disrupted - Crayford 29 September, 2009, 13:22Be the first to give this comment the thumbs up 0 likes

Prior to the impact of the credit crunch many banks failed to perform any liquidity related scenario analyses, simply because they did not anticipate that the liquidity inherent in the market would dry up.

Now, all anyone in the risk world can talk about is liquidity risk management. However, isn't this a bit liking taking a birth control pill in the third trimester?

The purpose of liquidity risk management is to identify potential future funding problems. To do that a bank must have a firm understanding of its net cash flows and the fungibility of its assets.

Reporting and communication should also be considered. Many banks still rely on email for quarterly risk reports. A more robust MIS system should be part of any bank's enhancement to their risk platforms.

Stress tests should be conducted regularly for several firm-specific and market-wide stress scenarios with the goal of identifying sources of potential liquidity strain. The results of stress tests should also play a key role in shaping the bank's contingency funding plan.