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Aug 22, 2024 · Common ways to manage liquidity risk include maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and diversifying funding sources....
- Will Kenton
Banks create liquidity by having enough funds (cash deposits) in reserve to allow depositors to withdraw money on demand. Liquidity creation becomes compromised when problems occur between the funding and the asset side of the balance sheet.
We study how banks manage their liquidity among the various assets at their disposal. We exploit the introduction of the ECB’s two-tier system which heterogeneously reduced the cost of additional reserves holdings.
As well, it underscores the importance of strong liquidity-risk management by banks in reducing the likelihood and severity of future financial crises, and outlines the benefits of the Basel III liquidity standards. Finally, it discusses some aspects of the LCR that merit further consideration.
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Jul 12, 2019 · We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent with a risk-return framework that hinges on banks' aversion to liquidity and interest rate risks.
Principle 1: A bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or
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This paper is organized around the following questions: • What is liquidity at a bank? • Why do we care about it? • Why are banks prone to runs? • How can banks achieve adequate...
