Premium
Survive the droughts, I wish you well: Principles and cases of liquidity risk management
Author(s) -
Tuckman Bruce
Publication year - 2017
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12082
Subject(s) - market liquidity , liquidity risk , balance sheet , business , shock (circulatory) , accounting liquidity , capital (architecture) , liquidity crisis , off balance sheet , liquidity premium , risk management , monetary economics , finance , economics , geography , medicine , archaeology
Short‐term, liquid assets are highly valued by lenders, but pose liquidity risk management challenges to borrowers. Basic principles to meet those challenges are to conduct liquidity stress scenario analysis; to form business plans for each stress scenario; to hold enough capital to sustain the planned, post‐shock balance sheet; and to hold a large enough liquidity reserve to survive the transition from the pre‐ to the post‐shock balance sheet. Historical failures, like Northern Rock, Bear Stearns, and MF Global have a lot to teach about implementing these principles. While regulatory frameworks constrain liquidity positions, they are no substitute for firm‐specific liquidity risk management.