Liquidity Risk

The global financial crisis in 2007-2008 highlighted the importance of Liquidity Risk management. Indeed, the financial institutions which encountered the most severe liquidity problems through the crisis were often those that relied excessively on short-term financing of longer-term illiquid assets. One of the drivers behind the development of these business models was a failure to penalize business lines for the liquidity risk embedded in the assets that were booked. These banks made large apparent profits before the financial crisis, but failed to recognize that these profits were based upon what proved to be extraordinarily fragile liquidity arrangements. The lack of transparency on liquidity risk was, therefore, one of the major reasons for the high shareholder value losses during the financial crisis.

manticore-projects provides a pragmatic solution for risk transfer pricing. Free of unnecessary overhead and out-dated ALM models, the solution focuses directly on the two major drivers of contingency cost for a bank: credit risk capital charges and liquidity buffers consisting of low-yield cash-like assets.

Coverage

  • Projections of cash flows under standard and stress scenarios
  • Analysis of the counterbalancing capacity of the bank in cases of significant liquidity stress situations
  • Calculation of credit risk capital charges, both using regulatory and market-based modelling approaches.
  • Calculation of Liquidity Coverage Ratio according to the definition in Basel III, including based on realistic stress-test scenarios
  • Risk transfer pricing calculation per asset and per counter-party. We follow established international guidelines like the Liquidity Cost Benefit Allocation Paper of the European Banking Authority (CP36 Anex II).