Liquidity & Treasury Risk Flashcards
What is liquidity risk
the risk that not enough cash will be generated to meet deposit withdrawals or contractual loans.
what are two types of liquidity risk
- funding liquidity risk
- market liquidity risk
define funding liquidity risk
the inability to liquidate assets or obtain adequate funding
define market liquidity risk
inability to unwind or offset specific exposure without significantly lowering market prices.
are liquidity risk and solvency risk the same?
no, a firm can be solvent but still unable to meet its obligations if assets > liabilities.
define the liquidity coverage ratio
how adequate cash reserves are on a short time horizon.
what is the formula for LCR
LCR=HQLA/(stressed net cash outflows over 30 days)
which two ratios should be greater than 100%?
LCR, NSFR
define net cumulative cash flow
a measurement of how long a bank can maintain positive liquidity in a stressed scenario.
give the formula for NCCF
NCCF=central bank eligible liquid assets+cash inflows-cash outflows
define the net stable funding ratio
a measurement of the stability of funding over one year.
give the formula for NSFR
NSFR=(available amount of stable funding)/(required amount of stable funding)
what does a treasury mandate do
manage the supply and demand of a bank’s capital, liquidity and funding across business lines and the consolidated bank
what is the goal of a treasury mandate
maximize return on equity while meeting regulatory requirements and the firm’s risk appetite
what is the main governance body of a bank
Asset-liability committee
what are 4 types of interest rate risk
- Gap/repricing risk
- Basis risk
- Yield curve risk
- Option risk
what is gap/repricing risk
the risk that arises because receiving cash flows are locked in at a certain rate while paying cash flows are subject to repricing as the rate changes over time.
what is basis risk
the risk that the correlation between floating and fixed interest rates differ from the desired level.
what is yield curve risk
the risk that interest rates will change and impact the returns of fixed-income securities.
what is option risk
prepayment risk
what is net interest income (NII) sensitivity
the impact to a bank’s income stream for the next 12 months assuming an immediate and sustained shock of ±100 bps to interest rates.
what is economic value of equity (EVE) sensitivity
the impact to the PV of assets and liabilities in a bank’s balance sheet due to a static interest rate shock.
the change in economic value of equity (MTM) after an interest rate shock of ±100 bps.
what are two sources of foreign exchange exposure and define each
o Corporate position: projected earnings in non-functional currency
o Structural position: capital denomination in non-functional currency.
