The Liquidity Risk Management Guide

Preface xi
 
List of Figures xiii
 
1 Introduction 1
 
1.1 The importance of an overarching liquidity risk management framework 3
 
1.2 The '6 Step Framework' 4
 
1.3 The structure of the book 5
 
1.4 Additional material - templates 6
 
2 Primer in Banking 7
 
2.1 Risk in banking 7
 
2.1.1 Managing the risk 9
 
2.1.2 The bank's balance sheet 11
 
3 The ALM Function - The Framework on Top of Liquidity Management 13
 
3.1 ALM within risk, finance and the businesses 14
 
3.1.1 Centralization versus decentralization 14
 
3.1.2 Accounting and ALM 15
 
3.2 The asset-liability committee (ALCO) 16
 
3.3 Areas covered by ALCO 17
 
3.3.1 Interest rate risk management 18
 
3.3.2 Liquidity risk management 18
 
3.3.3 Capital reporting and management 19
 
3.3.4 Setting or recommending risk limits 19
 
3.4 Enhanced role of the ALM unit 20
 
4 Liquidity - Background and Key Concepts 23
 
4.1 Definitions and more definitions 23
 
4.1.1 Liquidity - definition 23
 
4.1.2 Liquidity risk 25
 
4.2 The liquidity gap 26
 
4.3 The timing factor of liquidity risk: tactical, structural and contingent 27
 
4.4 It's all about the 'L' word 30
 
4.5 Liquidity, solvency and capital 30
 
4.6 Liquidity from a macroeconomic perspective - the singular case of contagion risk and asymmetric information 31
 
5 The Appropriate Liquidity Framework - Introduction to the '6 Step Framework' 35
 
5.1 Setting the stage - from policy to a practical framework 35
 
5.2 The heightened regulatory focus on liquidity 36
 
5.3 Recommended Liquidity risk management framework - The '6 Step Framework' 38
 
6 Step I: Sources of Liquidity Risk 43
 
6.1 The 10 sources of liquidity risk 45
 
6.1.1 Wholesale funding risk 46
 
6.1.2 Retail funding risk

GUDNI ADALSTEINSSON is the manager for Asset Liability and Management at one of the Irish
banks in the UK, responsible for overall balance sheet management. His experience ranges from running the group treasury for a European bank during the credit crunch, working for the Financial Services Authority, to providing liquidity advice to UK banks. Adalsteinsson was a group treasurer for an Icelandic bank during the unprecedented liquidity shocks of 2008, which offered him first-hand experience of liquidity risk
management under severe crisis. Between the years of 1998 and 2005, he was an executive director at
Lehman Brothers and Credit Suisse in London and Frankfurt, advising German banks on their liquidity
and structured credit investments. He has been a board member of banks in the UK and Denmark.
Adalsteinsson holds an MBA degree from the University of Cambridge and a bachelor's degree in
economics from the University of Iceland.