Intra-Day Liquidity Risk

Robert Fiedler

This chapter describes liquidity risks that can arise as results of a bank’s cash payment and securities settlement processes and is an addition to the previously formulated ideas. We shall talk about intra-day liquidity risk (ILR) in distinction to illiquidity risk which is captured by the forward liquidity exposure and compensated for by the counterbalancing capacity.

In the course of developing our model, this chapter could have been placed at the very beginning of the book as it describes the risks which may emerge and realise before the strategic illiquidity risks come into play, which we capture in the FLE. We have nevertheless decided to position this chapter near to the end as it goes deeper into the mechanics of the bank’s nostros and requires an overall understanding of where we want to go in our modelling. Furthermore, intra-day liquidity risks are a hot topic for the regulators, who are starting now to issue their ideas on how these risks should be captured and managed. Unfortunately, the concepts are still quite basic at the moment and we want to help to define them more thoroughly.

In order to avoid double counting the liquidity risk we already include in