Liquidity Risk: Managing Funding and Asset Risk by Erik Banks (auth.)

By Erik Banks (auth.)

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Sample text

A steel company has to be ready to respond to emergency repairs to plant and equipment that are not suitably covered by insurance, or to a lack of investor interest in rollovers of its commercial paper. As noted, this means that a firm must understand in detail the nature of its cash inflows and outflows; the structure of its assets, liabilities, and off-balance sheet contracts; and any potential surprises that might arise and consume cash resources. If it can do this accurately, then it is well positioned to manage its liquidity in a prudent manner and meet its financial imperatives under all conditions.

Some of these points are simple common sense and prudent risk management, regardless of industry or specialization. There are thus universal lessons to take away from this rather wrenching experience. Overview of the Book As we embark on our analysis of liquidity risk, we shall consider the topic from a number of theoretical and practical perspectives. ● ● ● Part I: In the balance of Part I, we shall expand on aspects of corporate liquidity, first by considering the nature of liquidity and financial operations in the modern corporation, and then by examining traditional sources of asset, liability, and off-balance sheet liquidity.

4 Global spreads did not Liquidity Risk Defined 17 begin to recede until 2009 (but remained high in the Eurozone through 2010–2011 as the credit-driven Euro crisis continued to unfold). , offered only) and increasingly illiquid market, which caused downward price gaps and attendant losses. Pulling back on credit was a key element in the global recession that soon made its way through the world’s economies, while selling assets (particularly the above mentioned structured securities) into a thinly traded market created financial losses and added further to liquidity imbalances.

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