FINS3630 Lecture Notes - Lecture 6: Liquidity Risk, Money Market Account, Monetary Policy Of The United States

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15 May 2018
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Liquidity Risk
- Liability side liquidity risk: demand deposits (core deposits), money market deposits,
transaction accounts
o Net deposit drain = deposit withdrawals deposit additions
o Purchased liquidity management: interbank market for ST loans (market for
purchased funds) allows DI to maintain overall BS size w/out disturbing
size/composition of A
Can insulate A side of BS from normal drains on L side of BS
o Stored liquidity mgmt.: liquidate A utilising stored liquidity (use cash as liquidity
adjustment mechanism
- Asset side liquidity risk: loan commitments drawn
- Liquidity index: , P= fire-sale price, P*= fair market price
- Financing gap = avg loans avg deposits
= borrowed funds (or financing requirements) liquid assets
- Liquidity regulation: liquidity coverage ratio, net stable funds ratio
remain liquid stress + unencumbered
Total net outflow over next 30 calendar days = outflows min(inflows, 0.75 of outflows)
- Net stable funding ratio: ensure LT assets are funded w min amount of stable liabilities (limit
reliance on ST wholesale funding)
o Available stable funding: bank cap, preferred stock/liab (maturity>1yr), portion of
retail/wholesale depo expected to stay w bank during period of idiosyncratic stress
- ASF factor: equity and liabilities into 5 categories- amount assigned to each category * ASF
factor= weighted sum total ASF
- RSF factor: assets into 5 categories amount assigned to each category * RSF factor= weighted
sum total RSF
- Monitoring issues:
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Document Summary

: liquidate a utilising stored liquidity (use cash as liquidity adjustment mechanism. Asset side liquidity risk: loan commitments drawn. Financing gap = avg loans avg deposits. , p= fire-sale price, p*= fair market price. = borrowed funds (or financing requirements) liquid assets. Liquidity regulation: liquidity coverage ratio, net stable funds ratio remain liquid stress + unencumbered. Total net outflow over next 30 calendar days = outflows min(inflows, 0. 75 of outflows) Asf factor: equity and liabilities into 5 categories- amount assigned to each category * asf factor= weighted sum total asf. Rsf factor: assets into 5 categories amount assigned to each category * rsf factor= weighted sum total rsf. High liquidity, low default risk assets lower returns. Limit liquidity/default risk of di, regulators have imposed a minimum liquid asset reserve requirement. Monetary implementation reasons multiplier, rr= reserve requirement ratio m= money market.

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