Liquidity Risk and Funding

Since the financial crisis, the timely and effective management of liquidity and funding has risen to the very top of the agenda for financial institutions. This trend has been driven by a series of inter-related factors:

  • The financial markets have experienced significant reductions in available sources of liquidity and funding.  In particular, the contraction of the unsecured wholesale funding markets has forced banks (and other market participants) to seek alternative sources of funding to support business activities
  • Due to credit deterioration, the cost of funding has risen significantly
  • Regulatory liquidity standards have been tightened under the latest round of Basel reforms, such as the implementation of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)
  • The Dodd-Frank and European Market Infrastructure Regulation (EMIR) legislations have wide-ranging liquidity impact arising from such inter-connected elements as the move to central counterparties, Initial Margin requirements on non-cleared derivatives, collateral eligibility limitations and restrictions upon re-hypothecation

These factors have led to significant focus and investment into the re-engineering of liquidity risk and funding processes across all institutions. Some of the most common investments being made within financial institutions as part of these changes are:

  • Implementing systems for intraday capture, aggregation and reporting of liquidity positions
  • Pricing for funding on derivatives pre-trade, through the use of Funding Valuation Adjustment (FVA) calculations
  • Setting up an enterprise-wide secured funding desk within a bank’s financial markets area - crossing repo, equity finance and collateral management
  • Optimizing usage of available inventory across the competing needs of collateral requirements, regulatory requirements and funding trading desk positions

We can help clients across their entire liquidity risk and funding framework, typical areas being:

  • Liquidity risk systems – selection, design and implementation
  • Regulatory gap analysis - e.g. versus requirements of LCR and NSFR
  • Funding methodology and modelling – e.g. FVA calculations, collateral/ funding optimization
  • Organisational change – e.g. set up of an enterprise-wide secured funding desk


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