Liquidity Risk

Ahraz Sheikh

9.1 INTRODUCTION

Liquidity risk arises when a bank does not have enough available cash to immediately meet the obligations of its daily operations. This is quite distinct from the core material risks described in Part II, which are concerned with the potential financial losses that a bank could experience in the course of its daily business. Such losses would form part of the cash outflows for which the bank would need to pay, but they are not concerned with whether the bank is able to fund those losses immediately. The models for these risks are concerned with determining the capital demand for unexpected losses, which is then used to size the corresponding capital buffer within the corresponding portion of the balance sheet, as described in Section 3.1. Expected losses (ELs) are typically covered by allocated provisioning lines, which requires cash to be set aside on the asset side of the balance sheet (either as a deduction on the asset side or as a liability entry for provisions).

Core material risk losses alone are not a complete description of the bank’s liquidity position, as they only describe a limited subset of the bank’s cashflows. The bank’s revenue sources would

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