Managing Liquidity in Banks

"Liquidity risk is a topic growing immensely in importance in riskmanagement. It has been much neglected by financial institutionsand regulators in recent years and receives, in the course of thesub-prime crisis, sudden and great attention. This book iswell-structured and provides a comprehensive and systematicapproach to the topic. It will help risk controllers tosystematically set up a liquidity risk framework in theirbank."
--Peter NEU, European Risk Team Leader, The BostonConsulting Group, and co author of Liquidity Risk Measurementand Management

"Mr Duttweiler's book is a welcome addition to the literature onliquidity risk measurement and management. In addition to hiscontributions to liquidity risk theory and liquidity pricing, theauthor provides a good overview of all of the criticalelements."
--Leonard Matz, International Solution Manager, LiquidityRisk and co-author of Liquidity Risk Measurement andManagement

Liquidity Risk Management has gained importance overrecent years and particularly in the last year, as major bankfailures have led to a re-evaluation of the significance ofliquidity in stressed market conditions. Liquidity risk is closelyrelated to market risk and solvency, suggesting its significance intimes of volatile and 'bear' markets, where a single bank'sfailure can have dramatic effects on market liquidity.

The term liquidity is not well-define, and a comprehensiveunderstanding of its common elements is often missing within abanking organisation. In too many cases, liquidity risk managementhas not been developed with a coherent framework and generallyaccepted terms and methods, creating weaknesses in its structureand vulnerability to market risk. In this title, Duttweileradvances the study of quantitative liquidity risk management withthe concept of the 'Liquidity Balance Sheet', which allocatesportfolios into a specific structure, and consequently is able toaccount for potentially negative surprises so that the necessarybuffers can be quantified.

The book begins with an overview of liquidity as part offinancial policy and highlights the importance of liquidity as partof a general business concept and as protector and supporter of abusiness as a going concern. The author examines the role oliquidity in helping managers to achieve high-level liquidity aimsto support operating units to achieve business goals. He looks atquantitative methods of assessing a banks liquidity levels,including LaR and VaR, to establish an integrated concept in whichliquidity is incorporated into the framework of financial policies.He also presents methods, tools, scenarios and concepts to create apolicy framework for liquidity and to support contingencyplanning.