CISI Risk - Chapter 7 Flashcards
What is a maturity ladder
Compares cash in-flows and out-flows
How would a firm calculate their net funding requirements
Analysing its future cash flows based on assumptions about the future behavior of assets
What kind of cash flows are unpreditable?
Derivative cash flows
What is a contractual cash flow?
Cash flows which can be predictably estimated
3 reasons why cash flows in a maturity ladder will differ from the actual cash reciepts
Not possible to estimate all cash flows - Derivatives are unpredictable
Credit risk - Risk weighted assets
Firm may not hold instrument until maturity
What is asset liquidity risk?
Being unable to transform assets into cash within a preferred time period without incurring losses.
What risk did Northern Rock suffer from ?
Liquidity
How will firms experience losses from Liquidity risk/
Cost of borrowing to meet obligations or through contractual penalties for not paying when required
What is liquidity gap analysis
Identifying mis-matches in company’s cash inflows and outflows
two disadvantages of liquidity gap analysis
Not consider credit risk & Assumes all cash flows will occour
What is Bid-Offer spread
Difference between the prices quoted by market makers.
What is Market Depth
Measure of the volume of transactions needed to move prices. The deeper the market, the higher the volume needed to move prices
One disadvantage of Market Depth
Market Depth can change very quickly
If the market is “Deep” would there need to be a small or high amount of trading transactions in order to move the price point.
Lots
What is Immediacy?
Measure of time to takes to achieve a deal in the market
What is resilience?
How quickly prices return to equilibrium following a larger trade
The more liquid the market, the faster/slower prices return to equilibrium?
Faster
4 components to managing liquidity risk
- R eadily determine its contractual liquidity position
- Overlay that view with assumptions about normal behavior
- Undertake stress testing
- Use the results to assess liquidity provision
6 techniques to ensure it stays within risk appetite and profitability goals?
- setting and monitoring liquidity limits
- setting and monitoring counterparty credit limits
- performing scenario analyses
- using liquidity at risk techniques
- ensuring diversification, and
- considering behavioural analysis.
3 drivers that increase the likelihood of liquidity risk
Market concerns over availability of credit
General Market and Economic Conditions
Global Shock
Three specific scenarios provide useful benchmarks;
A banks going concern condition
A banks specific crisis
A general market crisis
Liquidity risk can not be treated in isolation from what four risks
Credit
Market
Operational
Business
If lots of shares of an equity are sold at once, what will likely happen to the shareprice?
It will fall
The smaller the ratio, is the asset more or less liquid
More liquid
What type of liquidity measurment is captured in brackets?
LaR (Liquidity at Risk)
What is market dislocation?
No one will lend to anyone, regardless of the interest rates
What are the 4 impacts of market dislocation
Companies find it harder to borrow
Consumers can’t obtain mortgages
Central banks can not use interest rates as a economic lever
Bank profits falls
4 main funding methods for a bank
Wholesale money markets
Securitizations of loan portfolios
Retail deposits
Loan facilities with central bank
