When speaking of liquidity, this is the ability of a certain asset to be sold without any possible effect in the movement of the price. Usually, the stuffs that fall under the term liquid asset are money and cash.
The thing is that there are some people, especially business owners who are not able to manage their own liquidity.
That is why they end up suffering from great risk. When the risk has been there for so long, it is impossible for a certain establishments, especially banks to sustain their operation.
Therefore, possible establishment demise might happen sooner or later. If you are concerned of your business, it is important for you to know the key issues regarding liquidity risk management.
The Primary Principle of Liquidity Risk Management
Under this issue of liquidity risk management, it should be composed of single principle that places the responsibilities of the team for risk management squarely on the institution or bank.
Basically, there are a couple of actions that banks should perform in order for them to ensure strong and powerful liquidity risk management. In addition to that, the bank should also ensure that there is proper liquidity level in order to come up with their own trading requirements.
Under the same principle, the superiors in the banks are usually enjoined in order to make sure that there are appropriate individuals in the institutions that can apply the best liquidity risk supervision tactics.
The Liquidity Risk Management Governance
Here, there are three principles you need to take note of. These principles entirely relate to the level of liquidity risk management that a certain bank has to be prepared of.
The elements included here set specific level needed in order to meet the strategies on liquidity risk management that the bank is using, the development of the right managing structure is composed of directors and supervisors needed in securing the problem as well as the dealing of liquidity costs, risks, benefits and anything that might affect the entire pricing of the product.
Usually, these aspects are overlooked by most bank owners. That is why they experience great problem in terms of managing the liquidity risks they are facing.
The Measurement and the Management of Liquidity Risk
Specifically, this is the highlight of the liquidity risk management. Here, you need to take note of some principles that you can use in the future.
• Under this issue, you need to make sure that there is proper process in terms of controlling the monitoring, the measuring and the identification of the liquidity risk. In addition to that, banks should also have a total active view of the problem. This implies that institutions should manage their own exposures as well as their funding based on the business lines, legal entities and currencies.
• Moreover, institutions should also allow legal, practical and regulatory limits to the moving liquidity, especially when they are devising their own liquidity risk management.
• There should also be proper management of the collateral. This is to ensure that those assets which are already tied up can be separated from those that are still free.
• Additionally, regular stress tests must also be conducted. This is very important in order to ensure that the bank is capable of keeping their liquidity requirements.
• Furthermore, there should also be proper liquidity risk management when it comes to your intraday liquidity. This is important in order to ensure that the bank can easily meet its own obligations even if they arise. Moreover, the bank should also be aware that they must do this whether there are strained and normal conditions.
• Aside from the mentioned information, banks should also have their own formal emergency liquidity plan. This means that your liquidity risk management should have clear lines of escalation and responsibility procedures. The plan you have created should be tested in regular times.
• Lastly, banks are also required to devise high class liquid assets, unencumbered and buffer liquidity risk management in order to meet different situations. Furthermore, the assets should also be free from any barrier which might affect its overall use. So that when there are emergency risks that might arise sooner or later, you already know the things that you can do.
These are the things you need to know regarding the primary issues on liquidity risk management.
Indeed, it is important that you do your best in order to ensure that such risks will be managed and given solution. If these risks are not given proper attention, these might cause serious problems to the bank which can lead to its demise.
Of course, you do not want this thing to happen in the future. So if you are concerned of the liquidity risk management of your institution, you can consider learning from the details discussed.