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Liquidity Risk Management

This course focuses on all relevant liquidity risk measures that are being adapted to reflect the newly created complexities of modern financial markets

  • Course Instructor

    In his more than 20 years in the financial services industry, the Course Director has acted in various management capacities, both in strategic and operational functions while also being accountable for international projects of various sizes. His core area of work and experience is in financial risk management.


Course Overview

This two day course focuses on the best practices in measuring, managing and controlling liquidity risk undertaken by leading financial institutions after the lessons learned from the global financial crisis. The course tackles liquidity risk in conjunction with other risk categories such as interest rate and credit risk.

The course leads the attendees through all relevant liquidity risk measures that are being adapted to reflect the newly created complexities of modern financial markets such as analytics, forecasting, measurement and risk indicators and metrics. In addition, the course will cover the key areas of funds transfer pricing, stress testing, contingent planning and the new regulatory requirements under Basel III.

Summary of course content

  • Look critically at liquidity risk and how it can be managed and controlled
  • Understand current industry best practice
  • Learn from problems other institutions have experienced
  • Understand the regulatory developments and their impacts on banks
  • Define and articulate a comprehensive liquidity risk appetite and operationalise it into the day-to-day risk taking activities
  • Understand liquidity risk measures
  • Implement modern key risk indicators/metrics
  • Define liquidity stress testing scenarios and assumptions
  • Develop an effective and plausible contingency plan

Methodology

Teaching methodology will include lectures, discussions and case studies.

Who Should Attend?

  • CFOs, CROs
  • Liquidity Risk Managers
  • Treasury Executives
  • Market Risk Managers
  • Traders
  • Finance/Capital Planning Executives
  • Auditors (Internal & External)
  • Regulators

FTS-Eligible

This programme 'Liquidity Risk Management' is approved for listing on the Financial Training Scheme (FTS) Programme Directory and is eligible for FTS claims subject to all eligibility criteria being met.

Please note that in no way does this represent an endorsement of the quality of the training provider and programme. Participants are advised to assess the suitability of the programme and its relevance to participants' business activities or job roles.

The FTS is available to eligible entities, at a 50% funding level of programme fees subject to all eligibility criteria being met. FTS claims may only be made for programmes listed on the FTS Programme Directory with the specified validity period. Please refer to www.ibf.org.sg for more information.

Supporting publication

   

 DAY ONE

The global financial crisis and failures of financial institutions - Review, conclusions, and outlook

Case study: "The fall of Northern Rock - Britain’s biggest banking disaster"

  • History and business strategy of Northern Rock
  • Asset growth strategy and its funding consequences
  • Interaction funding mix and bank strategy
  • The economy/the markets
  • The sub-prime crisis, the run on Northern Rock and the consequences on liquidity
  • The aftermath of the run
  • What went wrong?
  • What can liquidity risk managers learn from the case?

Liquidity risk within the supervisory frame

  • General issues
    • Focus of the regulators
    • Regulatory responses to liquidity problems: Guarantees, recapitalisation, bad banks
    • Inter-relationship between liquidity regulation, capital adequacy and other prudential measures
  • Sound practices for managing liquidity in banking organisations
  • Basel III
    • Capital ratios and target
    • Contingent buffers
    • Systemic risk
    • Qualitative liquidity requirements
    • Liquidity coverage ratio
    • Net stable funding ratio
    • Monitoring tools for liquidity risk
    • RWA requirements
    • Implications for financial institutions
    • Capital demand under Basel III

Case study: Deutsche Bank 

  • Dodd-Frank Act, United States
  • Ringfencing -Vickers Report, United Kingdom
  • Where does it all go and what impacts do all regulatory changes have?

Analytical overview/governance 

  • Key bank performance indicators: What to achieve
    • Profitability
    • Growth
    • Capital adequacy
    • Liquidity
    • Leverage

Example: Deutsche Bank 

  • Defining liquidity risk: Funding and market liquidity
  • The relationship between capital adequacy, solvency and liquidity
  • Funding appropriate for the risk profile and commercial needs of the assets, products and business lines
  • Stability, diversity and tenor matching of funding sources
  • Key issues: Off balance sheet, derivatives, securitisation, intraday
  • Gap management across tenor and currency buckets
  • Strategy for liquidity risk, policies and practices
  • Inter-relationship between liquidity and other risk types
    • Interest rate risk, including discussion on current markets
    • Credit risk
    • Operational risk, legal risk and reputational risk
  • Liquidity profiles of large financial institutions

Liquidity risk as part of ALM - a policy framework 

  • Elements of modern asset liability management (ALM)
  • Policy scope and frame
  • Liquidity policy
  • Authorities and responsibilities
    • Organisational Issues
    • Board of Directors
    • Asset Liability Committee (ALCO)
    • Treasury
    • Risk Committee

Case study: Deutsche Bank

  • Funding mix
  • Liquidity reserves
  • Risk adjusted profitability
  • Risk taking capability
  • Management reports
  • Internal controls
  • Organisation of risk management

Intragroup liquidity transfers - Fund Transfer Pricing (FTP)

  • Overview of fund transfer pricing
  • Improvement of cash flows, earnings, risk and value through FTP
  • Alternative methods and addressing FTP objectives
  • Approach for implementation of FTP mechanism
  • Adjustment for other factors beyond the benchmark
  • Using the FTP for performance forecasting and measuring branch profitability
  • Incentives, policies and procedures
  • Practical challenges

DAY TWO 

Forecasting, measuring and monitoring funding requirements

  • The components of the balance sheet
    • Accounting presentation vs. Liquidity view
    • The components on the asset side
    • The components on the liability side
  • Securitisation
  • Cash flow forecasting
    • Classification of items depending on certainty of timing and magnitude
    • Time buckets and granularity
    • Combining contractual and behavioural cash flows
    • Deterministic and stochastic behaviour of instruments
    • Statistical techniques
    • Simulations techniques - historical simulation and Monte Carlo simulation
    • Probability levels and holding period
  • Short-term and structural liquidity management
    • The Value-at-Risk (VaR) concept
    • Liquidity-at-Risk (LAR)
    • Liquidity Value-at-Risk (LVAR)
  • Scenarios
  • Trading/Derivatives issues
  • Risk buffers

Case study: Commerzbank 

    • Expected liquidity exposure
    • Dynamic liquidity exposure
    • Balance sheet liquidity
    • Available net liquidity

Managing liquidity risk - metrics and limits

  • Range of liquidity metrics
  • Maturity mismatch approach - gap analysis
  • Modelling behavioural adjusted liquidity gaps - best practices
  • Concentration risk
  • Market indicators
  • Liquidity ratios
    • Liquidity coverage ratio
    • Net stable funding ratio
    • Other ratios
      • Limits and risk tolerances
      • Internal and external communications

Examples: International banks 

Liquidity stress testing 

  • What is stress testing?
  • Why stress test liquidity?
  • Stress test priorities
  • Balance sheet items
  • Sensitivity and scenario analysis
    • Shock events
    • Other stress scenarios
    • The subprime crisis
    • Interest rate scenarios
    • Credit scenarios
  • Assumption sensitivity
  • Additional considerations
  • Reverse stress testing in practice for trading books

Contingency funding planning (CFP) 

  • Objectives of the CFP
  • Telltale signals
  • CFP strategy and organisation
  • Communication
  • Asset-related strategies
  • Liabilities-related strategies
  • Capital cushion
  • In his more than 20 years in the financial services industry, the Course Director has acted in various management capacities, both in strategic and operational functions while also being accountable for international projects of various sizes. His core area of work and experience is in financial risk management.

    He has been a consultant and trainer since 2010. Prior to this, he worked for large international financial institutions, in roles
    such as Global Head of Risk Control for Commerzbank Group in Frankfurt, Germany and Head of Strategic Risk Management & Control for HypoVereinsbank/UniCredit Group in Munich, Germany.

    In his role as Global Head of Risk Control for Commerzbank Group, he was responsible for the Basel II project at the institution. The project included all relevant project phases (advanced approaches), business and strategic aspects, all
    risk types (credit risk and operational risk) and interaction with regulators world]wide. He was a member of top management
    committees from the respective institutions. He also brings in operative risk management experience from his role as Branch Manager for Commerzbank’s business in London. He was responsible for credit risk management for Western Europe and South Africa, which included a significant credit sanctioning competence.

    He spent the first 10 years of his career in the capital markets business. One of his key roles was Head of Risk & Compliance
    for Commerzbankfs derivatives subsidiary Commerz Financial Products.

    His expertise and experience covers a broad business and product spectrum ] retail banking, corporate lending, investment
    banking, asset management, commercial real estate and risk types: Credit risk, market risk, liquidity risk/ALM, operational risk.

    He holds an MBA from Long Island University in New York. He also completed the Advanced Management Program at the INSEAD Business School in Fontainebleau, France.

    Courses run by this instructor