International Journal of Financial Management

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Measurement of Total Liquidity Assets Risk Resulting from Increase of Liquidity Spread


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1 FinRiskConsult, Fresenius, University of Applied Sciences, University of Applied Management, Germany
     

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The importance of analysing the effects of changes in liquidity spreads for long maturities on both costs and wealth increases with the increasing importance of capital market-based refinancing by banks. The present study proposes a present value based approach for middle-sized banks. It enables to measure the impact of the extreme change in the institution’s own liquidity and spreads on the current liquidity situation by investigating the entire maturity horizon to a dangerous extent. Different scenarios for refinancing alternatives due to the different developments of the liquidity spreads can be analysed straightforwardly. This enables a rapid assessment of the risk situation over the modelled time. In the dynamized version, which covers the planning horizon, the interest rate effects arising over time are also made visible. The result of the model approach is suitable for strategic decisions in planning the refinancing structure under alternative conditions.

Keywords

Banks, Basel III, Liquidity Risk, Liquidity Spread, Present Value, Stress-Testing.
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  • Measurement of Total Liquidity Assets Risk Resulting from Increase of Liquidity Spread

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Authors

Eugenia Schmitt
FinRiskConsult, Fresenius, University of Applied Sciences, University of Applied Management, Germany

Abstract


The importance of analysing the effects of changes in liquidity spreads for long maturities on both costs and wealth increases with the increasing importance of capital market-based refinancing by banks. The present study proposes a present value based approach for middle-sized banks. It enables to measure the impact of the extreme change in the institution’s own liquidity and spreads on the current liquidity situation by investigating the entire maturity horizon to a dangerous extent. Different scenarios for refinancing alternatives due to the different developments of the liquidity spreads can be analysed straightforwardly. This enables a rapid assessment of the risk situation over the modelled time. In the dynamized version, which covers the planning horizon, the interest rate effects arising over time are also made visible. The result of the model approach is suitable for strategic decisions in planning the refinancing structure under alternative conditions.

Keywords


Banks, Basel III, Liquidity Risk, Liquidity Spread, Present Value, Stress-Testing.

References