Liquidity risk

With liquidity risk (sometimes called funding risk) is the risk, needed cash to procure or not only to increased costs. Liquidity risk is a financial risk.

System

The refinancing risk is because funds with a shorter capital commitment period will be added as they are created. It is a typical risk of banks and results from their economic function of the periods and lot sizes transformation.

Often, the refinancing risk is broken up into three categories:

• Refinancing risk i.e., S.
• Deadline risk
• Withdrawal risk

Here, the refinancing risk results from the fact that the agreed capital commitment limits on the asset side are longer than on the liabilities side, which creates the risk that the follow-up financing can not be represented (hence follow-up financing risk or risk of substitution ).

The maturity risk is the risk that agreed payments - eg loan repayments - delay and thus lack the appropriate liquidity.

The withdrawal risk is analog the risk that cash is withdrawn prematurely or unexpectedly utilized, such as the retrieval of deposits or loan commitments. In its extreme and well-known form of the demand risk is called a " bank run " hitting.

The above forms the refinancing risk and threaten the risk of insolvency directly the existence of the concerned company. A newer concept formation is that of the liquidity spread risk, so a resulting from maturity transformation risk to earnings is called. With liquidity spread risk is the risk that follow-on investments in interest service, the receiver is liquidity fundraising debtor must pay on the basis of credit risk ( liquidity spread from the perspective of the debtor, credit spread from the perspective of creditors) is increased, thus increasing refinancing costs, profits diminish.

Classical theories Refinanzierungssrisiken

In the management literature often find the following four theoretical approaches to funding risk, which are now, however, only limited significance:

• Golden rule of banking ( Otto Hübner 1854): After the golden rule of banking there is no mismatch between the capital commitment period the liabilities side ( borrowing ) and the asset side ( use of funds ) give. Thus, no maturity transformation would be operated and there were no liquidity risk.
• Base theory ( Adolf Wagner 1857): The base theory takes into account the fact that deposits are at least partly longer than their nominal bond duration. One example is the current accounts on which money is usually longer than in the one-day notice period. The part of the nominal short-term deposits, which is removed again after a short time can not be used as the " dregs " to refinance long- term investments.
• Shiftability Theory (Karl Knies 1879): The Shiftability theory is in a sense the opposite of the base theory for assets; they considered that at least some assets liquidated before the end of their actual run-time ( " monetized " ) and may thus offset cash outflows. For this reason, banks hold a so-called liquidity reserve of marketable liquid securities that can be converted, if necessary by sale or repurchase in liquidity.
• Maximum load theory (Wolfgang Stützel 1959): In contrast to the approaches mentioned so far, the maximum stress theory sees the refinancing risk as a yield risk. It assumes that each asset can be liquidated in a corresponding reduction in value. If the sum of these reductions in value is less than the amount of equity, any outflow of cash can be met without the danger would be given to a bankruptcy.

The golden rule of banking negates the economic task of maturity transformation and is therefore in the modern banking meaningless. The sediment and the Shiftability theory have been included in modern procedures for liquidity risk management. Likewise, the basic idea of ​​the maximum stress theory that assets may need to be liquidated only at a discount, continue to be used. The maximum stress theory is not suitable as a management tool on a going -concern assumption ( cf. going concern basis ) as they possibly providing for the liquidation of a significant part of the company.

Modern approaches to risk management

Current approaches to the management of the refinancing risk will concentrate on the consideration of cash flows. This future cash outflows and inflows are derived taking into account the sediment and the Shiftability theory from the business portfolio.

Common elements of liquidity risk management are:

• A law passed by the management framework for liquidity risk management ( risk strategy ) that takes into account the objectives of the business strategy.
• Rules to limit liquidity risks, such as the definition of risk-limiting limits.
• A system for measuring and monitoring liquidity risks.
• The analysis of the impact of the crisis scenarios on the company's liquidity.
• The establishment of a liquidity risk-related reporting.
• The holding of reserve liquidity to cover unexpected cash outflows ( in the form of liquid securities, eligible collateral, credit, obtained loan commitments).
• Diversification of funding sources (eg customer deposits, repurchase agreements, debt securities in issue, securitization ).
• Definition of measures in the event of a liquidity squeeze ( emergency planning).
• Into account the cost of obtaining liquidity in the system of internal transfer prices.
• Treatment of liquidity risk by Internal Audit.

Liquidity gap analysis and gap analysis

A common way to represent the liquidity risk, the liquidity gap analysis and gap analysis associated represents a cash flow balance sheet contains a forecast of future cash receipts and outflows, which are displayed on a timeline. The forecast is made ​​on the basis of the transactions of the Bank, if necessary, taking account of new and port business. In addition to accounting while also off-balance sheet items such as loan commitments or positions are taken into account in financial derivatives.

Based on the cash flow balance sheet the maturity mismatches ( " gaps " ) can be analyzed between deposits and withdrawals ( " gap analysis ").

While in the normal cash flow balance sheet which are due to the different time payments will be reported, the cumulative liquidity gap analysis indicates the sum of all payments to the individual time points. The background is that earlier time lying surplus funds may be used to cover future cash needs. At the time at which the net cumulative payments is negative, the company in question would be insolvent under the occurrence of the assumptions made and without additional measures.

Liquidity risk ( in the sense of uncertainty about future developments ) is caused by businesses and products whose future cash flows are still unknown. For these businesses and products modeling assumptions must be made. Funding matrices are often created with the use of different assumptions. In particular, through the adoption of adverse business or market developments ( stress scenarios, stress testing ) can be investigated whether the undertaking concerned is in a position to consider the occurrence of such developments.

By linking the funding matrix with variable refinancing spreads the income statement liquidity risk can be determined ( " liquidity equalization method ").

Prudential treatments

The regulatory treatment of liquidity risk is largely regulated at national level. An international harmonization, as they were made in the capital rules by the Basel Committee, has been missing. As a result of the financial crisis starting in 2007, the Basel Committee has, however, developed recommendations on quantitative rules to limit liquidity risks that are present ( " International framework for liquidity risk measurement, standards and monitoring" ) in December 2009 as a draft. Herein, two prudential indicators are proposed, with which the liquidity risk in the short ( up to 30 days, so-called liquidity coverage ratio ) and in the middle ( up to 1 year, so-called net stable funding ratio) period should be limited.

In Germany, the quantitative requirements for liquidity risk in § 11 of the Banking Act are set. These are liquidity regulation, which terminated the previously Principle II replaced on 1 January 2008, further specified.

The internal management processes published the Basel Committee on Banking Supervision 2000, the recommendation " Sound Practices for Managing Liquidity in Banking Organisations ". In September 2008, a revised version was also released as a response to the financial market crisis.

The Committee of European Banking Supervisors ( CEBS) has also been presented in December 2009 Guidelines ( " Guidelines on Liquidity Buffers & Survival Periods "), which are aimed at the bank's internal risk management processes in the sense of the second pillar of Basel II.

At the national German level apply in this context as for all risks, the requirements of § 25a of the Banking Act risk management. These are executed in the MaRisk on. In particular, there is liquidity risk in the MaRisk the BTR section 3, which is geared primarily to the refinancing risk. The changes in the Basel " Sound Practices " found on the European banking directive input into the revised version of MaRisk from August 2009.

Swell

• Peter Bartezky, Walter Gruber, Carsten S. Wehn (eds. ): Handbook liquidity risk. Identification, measurement, control. Poeschel Verlag, Stuttgart 2008, ISBN 978-3-7910-2747-0.
• Büschgen, Börner: Bank Management. UTB 4th edition, Stuttgart 2003, ISBN 3-8282-0241-4 ( ISBN formally wrong ).
• Leonard Matz, Peter Neu (ed.): Liquidity Risk. Measurement and Management. John Wiley & Sons (Asia ), Singapore 2007, ISBN 978-0-470-82182-4.
• Michael Pohl: Liquidity risk in banks - Approaches to measurement and profit-oriented control, Knapp Verlag, Frankfurt am Main 2008, ISBN 978-3-8314-0828-3
• Wagner, Schmeling, Meyer, Kemp ( KPMG): risk factor liquidity in banks. Research in Capital Markets and Finance Working Paper 2002-3, University of Munich.