Liquidity Risk

Customer projects:

• Introduction of the standard software riskpro™ as an evaluation tool for liquidity and interest-rate risk at a large German federal state bank. Tasks covered the whole range of activities necessary for software introduction: design of interfaces and definition of product mappings, implementation of the model parameterisation for the analysis of present value shifts, interest rates and liquidity gaps in riskpro™ including the modeling of non-deterministic cash flows (account, credit lines, rights of cancellation etc.), determination and modeling of the liquidity reserve, design of the data model in the reporting data base and corresponding reports as well as the validation of the calculations in riskpro™ and according trainings for users. 
  
  
• Two workshops on liquidity risk controlling and management and asset liability management respectively at a large German federal state bank. Detailed discussions on: regulatory aspects (LiqV, new MaRisk and new FSA requirements), modeling in various contexts, the definition of stress scenarios, statistical methods and stochastic approaches (LaR/LVaR), FTP (especially the incorporation of liquidity costs) as well as dynamic simulations.
  
  
• Review of the existing framework for liquidity risk at a big German federal state bank: appraisal and pre-study for the introduction of an internal model and preparation of an overview document for regulatory authorities.
  
  
• Software selection for liquidity risk management at a German federal state bank: collection and restructuring of the business and technical requirements, support in the preparation of the RFP and first supplier contact.
  
  
• Liquidity reporting for management and controlling purposes at a German corporate bank. A several-stage structural liquidity gap analysis (deterministic/ non-deterministic cash flows, counter balance capacity, special effects) was implemented in the standard software, riskpro™ . Results were reported incorporating the ability to drill-down individual stages. The associated data processes were optimised towards efficiently evaluating differences in the incoming data and a tool showing the gap ("delta") between two liquidity gap analyses had been created.
  
  
• Training lasting several days on dynamic simulations and the measurement of liquidity risk in riskpro™ had been held at a German corporate bank: the relevant functionalities were presented and interactively demonstrated.
  
  
• Design and implementation of an extended and updated risk management concept in the treasury department of a large German bank's new specialised entities (profit centres). In particular a profit centre for liquidity risk management was established, the short term interest rate and liquidity management was centralised in the money markets, a liquidity management function to manage the short term and structural liquidity profile of the bank had been introduced, a method to calculate separately liquidity costs of asset and liability positions and entities was designed and implemented, functionalities to determine and evaluate the bank's liquidity spread benchmark curves were established, the previous liquidity gap analysis extended and the modeling of liquidity risk in particular concerning the stress scenarios including an adequate update of the reporting were enhanced. The reporting as well as the methodology were consolidated between risk controlling and liquidity management departments.
  
  
• The design of a group-wide interest rate and liquidity risk management tool for the financial services department of a big automobile corporate, the existing methods of services, bank and corporate were consolidated, the profit centre framework designed, sample calculation for the FTP analysis performed and the corresponding implementation as well as parameterisation based on a standard software realised.
  
  
• Workshops for the treasury of the financial services department of a big automobile corporate at senior management level covering several financial topics like communications effect on certain financial activities (dividends, public/share issues, rating etc), choice of adequate funding instruments, outsourcing of balance-sheet terms (leasing, securitisation, pension funds), regulatory reporting (IFRS, hedge accounting), risk management (liquidity, interest rate, credit settlement risk) as well as cash management (cash pooling, in-house bank, payment factory).
  
  
• Introduction Fermat for ALM analyses at a large German mortgage bank. Analyses with accompanying reports for Market risk, Performance calculation, Damage allocation, Liquidity management (short and long term liquidity gap), and Cover valuation for nominal and present value including stress testing were implemented. Hedge accounting (portfolio hedge for credits based on results of Fermat) as well as a credit limit system had been designed and implemented.
  
  
• Design and implementation of single features in an existing configuration of Focus ALM (SunGard) for liquidity and interest rate sensitivity gap reports, treasury analyses (especially FTP and profit attribution) as well as hedge-accounting (effectiveness tests) at a big German federal state bank: treatment of options with respect to liquidity and interest rate sensitivity gap reports, valuation of contracts that are partially in cover funds, analyses dependent upon different subsidiary agreements concerning loans.
  
  
• The setup of a bank-wide profit centre framework for the trading book based on an existing market risk system of a big retail bank with support for: past-merger activities (harmonisation of valuation methods, integration of the IT infrastructure, trade control, consolidation of the limit management methods, the liquidity management etc), the design of the profit centre frame work, the treatment of special topics like prepayments of loans, implementation of reports and processes as well as the assistance during process of acceptance by the executive board. 
  
  
• Setup of a sequence control system for the liquidity risk management at a IT supplier of a large German retail bank: design of the technical processes (including parallelisation) for the liquidity risk management as well as implementation with regard to market data and scenario import, the calculation of the gap and liquidity analyses under the given scenarios on the total bank portfolio, generation and distribution of reports.
  
  
• Risk analysis and design of the mapping of synthetic repos with respect to liquidity analyses (gap analyses on conditions of different scenarios) at a large German bank.

Other References:

• Investigation of the functionalities of software serving ALM and liquidity risk management in parts with test installations and preparation of white papers for requirements from ALM and liquidity risk. Partially in co-operation with a software provider.
  
  
• Since 2007 continuously held lectures at banks, conferences, for software provider as well as on internal training and external recruiting events on trends/best practices in liquidity risk management. Every lecture gives a survey on the current regulatory topics of liquidity risk management and deals with some more specific issues. For example the modeling of products for liquidity analyses, the implementation of measures for liquidity risk and reports as well as liquidity risk management processes in a bank.