The Great Financial Crisis (GFC), which began in August 2007 and whose effects are still being felt today, brought to center stage the preeminent role of liquidity risk and funding risk measurement and management. Maturity mismatches, excessive reliance on volatile funding, overly optimistic assumptions on the saleability of assets thought to be liquid, and an imperfect understanding of the behavior of depositors – both insured and uninsured – led many institutions to be unprepared for the tumultuous effects of sudden drops in actual and perceived asset quality that brought down many large financial institutions. This course reviews fundamental concepts of liquidity risk measurement and management, analyzes what went wrong during the 2007-2009 period, covers the public policy responses to these prior failures (such as the Basel III liquidity metrics, contingency funding plans and liquidity transfer pricing, the novel requirement of an Internal Liquidity Adequacy Assessment Process or ILAAP to complement the Internal Capital Adequacy Assessment Process or ICAAP, and the growing use of liquidity stress testing), and views liquidity risk management from the bankers’ point of view as well as the supervisors’, and from a macro as well as a micro perspective.
By the end of the course, participants will be able to explain how and why banks fail because of inadequate liquidity risk management; distinguish between market liquidity risk and funding liquidity risk; understand both the rationale and the mechanics of the Liquidity Coverage Ratio, the Net Stable Funding Ratio, Survival Horizon Analysis, and other contemporary metrics and tools of liquidity risk management; know how to assess the adequacy of a contingency funding plan and an ILAAP; and understand the basics of liquidity transfer pricing and liquidity stress testing.
This course is intended for financial stability or banking supervision personnel with 2-4 years of experience, and with a role in either developing or applying policies to address liquidity risk management at commercial banks and other depository institutions. Participants should have a basic understanding of the Basel Core Principles of Effective Banking Supervision and other Basel Committee documents related to liquidity and have experience reviewing a bank’s liquidity position either on an on-site examination or through the off-site monitoring process. By invitation of SEACEN member central banks / monetary authorities, officials of stand-alone financial sector regulatory authorities and deposit insurance agencies are also encouraged to apply.
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