14. Liquidity Risk

Question 1

Which are the 2 liquidity risks?

Answer 1

Liquidity Trading Risk:
Price received for an asset depends on
§ The mid market price
§ How much is to be sold
§ How quickly it is to be sold
§ The economic environment

Liquidity Funding Risk:
Sources of liquidity
§ Cash and Treasury securities
§ Ability to liquidate trading positions
§ Ability to borrow
§ Retail and wholesale depoosits
§ Securitization
§ Central bank borrowing

Question 2

Describe Basel III Regulations

Answer 2

• Liquidity coverage ratio: bank can survive 30 days of acute stress
• Net stable funding ratio: Stability of funding sources consistent.

Question 3

What other metrics can be considered in liquity risk?

Answer 3

• Asset encumberance (activo se utiliza como garantia para prestamo)
• Counterbalancing capacity (capacidad de compensar los riesgos)
• Maturity ladder (vencimiento de inversiones)
• Cost of funding

Question 4

Funding Plan (FP)?

Answer 4

+ It outlines how the bank will obtain the funds necessary to support its lending and investment activities
+ Key components:
-Assessment of funding needs
- Identification and Diversification of resources
- Cost os analysis
- Monitoring and review.

Question 5

Cintigency Funding Plan (CFP)

Answer 5

+ Strategy to manage funding under stress scenarios.
+ Minimize impact of liquidity disruption.
+ Key components:
* Liquidity stress scenarios
* Quantification of liquidity needs
* Liquidity risk tolerance
* Actionable strategies
* Monitoring and reporting

Question 6

What is Laveraging? How the Lavaraging cycle is?

Answer 6

Leveraging refers to using borrowed money to increase the potential return on investment or growth of a business. It’s like borrowing money from a friend to buy more candies with the hope of selling them at a higher price and making more money. If things go well, you earn more, but if not, you may have trouble paying back the borrowed money.
= debt / assets

Cycle:
Investors allowed to increase to leverage ->
They buy more assets ->
Asset prices increase ->
Leverage of investors decreases->
Repeat.

Question 7

What is Deleveraging? How the Cycle is?

Answer 7

Deleveraging refers to the process of reducing the level of debt by a company, individual, or economy. It’s like if you borrowed a lot of money to buy candies, but now you want to pay back that money to your friend and have less debt. This might mean selling some of your candies, saving more of your earnings, or cutting back on spending so you can pay off what you owe and reduce your financial risk.

Cycle:
Investors required to reduce leverage ->
They do this is by selling assets ->
Asset prices decline ->
Leverage of investors increases ->
Repeat.