Liquidity Risk

1767 Words4 Pages
bulb-icon

Recommended: Financial risks types

Within the financial industry, financial institutions face various forms of risk. Financial institutions must effectively handle and manage these various risks to maintain stability and remain competitive. For example, financial institutions can face the risk of insolvency to the risk associated with foreign exchange rates. Nevertheless, not all financial institutions face all types of risk. Additionally, when financial institutions share the same risks, they may not do so at the same level. Some financial institutions may face higher interest rate risk while others face higher insolvency risk. This paper will focus on liquidity risk. Through an analysis of three different types of financial institutions and their level of liquidity risk, one will be able to better understand liquidity risk, its impact on financial institutions, and how it can be mitigated.

When studying liquidity risk, the most important task is to understand what it involves. Saunders and Cornett (2011) and LeJeune (2010) noted liquidity risk to be the risk of an unexpected swell in withdrawals of liabilities which would require a financial institution to liquidate their assets quickly and at a lower rate than expected, also known as a liability-side risk. Furthermore, liquidity risk can be an asset-side risk which involves off-balance sheet activities, such as lines of credit, being exercised precipitously forcing the financial institution to liquidate (LeJeune, 2010; Saunders & Cornett, 2011). Additionally, liquidity risk can arise from a financial institution’s real or perceived failure to satisfy its contractual commitments (Board of Governors, n.d.).
Managing liquidity risk is not an abnormal occurrence for financial institutions as they handle...

... middle of paper ...

... Principles for sound liquidity risk management and supervision, 1-38. Retrieved from http://www.bis.org/publ /bcbs144.htm
Board of Governors of the Federal Reserve System (Board of Governors). (n.d.). Supervisory policy and guidance topics: Liquidity risk management. Retrieved December 22, 2013, from http://www.federalreserve.gov/bankinforeg/topics/liquidity_risk.htm
LeJeune, A. T. (2010). Risks facing financial institutions: Liquidity, foreign exchange and sovereign risks. International Journal of the Academic Business World, 4(2), 31-37. Retrieved from http://jwpress.com/
Saunders, A., & Cornett, M. M. (2011). Financial institutions management: A risk management approach (7th ed.). New York, NY: McGraw-Hill/Irwin.
Turner, S. H. (2011). What we learned about controlling risk (cover story). Bank Director, 21(4), 40-45. Retrieved from http://www.bankdirector.com/

Show More
Related

  • Financial Analysis: Hydrogenics Corporation

    909 Words  | 2 Pages

    The Corporation has sustained losses and negative cash flows from operations since its inception. The Corporation is exposed to liquidity risk as it continues to have net cash outflows to support its operations.

    Read More

  • Quantitative Easing During the Bush and Obama Administrations

    1205 Words  | 3 Pages

    Mallin, Jay. "Federal Reserve (Fed).” The New York Times, n.d. Web. March 21, 2012. .

    Read More

  • Ally Financial Inc.

    2159 Words  | 5 Pages

    In order to analyze Ally, I will be evaluating its balance sheet and performance ratios over the period from June 2006 to June 2013. This will show the progression of the bank throughout the 2008-2009 financial crisis. I will compare Ally’s financial data to the whole US banking industry as a way to analyze the banks risk and performance over that period. Factors such as profitability, credit risk, capital adequacy, liquidity risk, interest rate risk, market risk, ad off balance sheet exposures will all be evaluated.

    Read More

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act

    1575 Words  | 4 Pages

    The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...

    Read More

  • The Purpose of the Federal Reserve System

    2699 Words  | 6 Pages

    It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The Board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market.

    Read More

  • Dodd-Frank Act Case Study

    505 Words  | 2 Pages

    Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.

    Read More

  • Yale University Case Study

    817 Words  | 2 Pages

    In dealing with the liquidity issues, Yale’s had evolved several of non-disruptive sources of liquidity, such as using bonds and equities as collateral for short term loans. Yale’s also had access to commercial paper facilities to support endowment liquidity. The forecasting also plays important role to avoid panicking. And the last one is at the 50% of illiquid assets goals should produce the slightly lower rates of return but lower volatility. Those are the strategy of Yale to face the liquidity

    Read More

  • The United States and Illegal Immigration

    1096 Words  | 3 Pages

    Rousmaniere, Peter. “Facing a tough situation.” Risk & Insurance 17.7 (June 2006): 24-25. Expanded Academic ASAP. Web. 23 March 2011.

    Read More

  • Ratio Analysis Of Starbucks

    1252 Words  | 3 Pages

    In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.

    Read More

  • Current Monetary Policy Of The United States

    2057 Words  | 5 Pages

    ...y with abundant liquidity: a new operating framework for the Federal Reserve. Policy Brief PB14, 4.

    Read More

  • The Federal Reserve System

    2337 Words  | 5 Pages

    Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress

    Read More

  • Exhange Risk Faced by Multinational Corporations (MNCs)

    1553 Words  | 4 Pages

    Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...

    Read More

  • Federal Reserve System Case Study

    740 Words  | 2 Pages

    As we are moving to the end of the course, we want to present you with the Federal Reserve System (Fed), which is the central bank of the USA. We are going to explore the roles of Fed in regularizing the economy, its function, and also the tools used in doing that. We will learn how central banks regulate the banking system and how they manage money supply in economies. We will also be presented to the financial crises lessons we can be able to understand the importance of the regulatory system; and then, we answering questions such as:

    Read More

  • Cash Management

    1080 Words  | 3 Pages

    Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.

    Read More

  • The Global Economic Crisis

    664 Words  | 2 Pages

    Ferguson et al. International financial stability. Geneva: International Center for Monetary and Banking Studies, 2007. Print.

    Read More

More about Liquidity Risk

Open Document