Liquidity Risk

The risk I will be focusing on is liquidity risk. There is a high possibility that SBU bank will face this risk in the near future.

Liquidity risk refers when the bank has a risk of not able to meet its financial requirements as they fall due to losses through funds raising and assets liquidation. It usually occurs due to the inability of a firm to convert a hard asset (security) to cash without a loss of cash flows in the process.

Liquidity risk is often happened due to other forms for financial risks such as credit, market and operational risks. In a case where a SBU’s ability to raise funds at reasonable prices may be affected due to other problems in business areas which will eventually increase a chance of liquidity risk. For example,

Both FSAP assessors and MAS have come to an agreement to test out two scenarios which are appropriate to Singapore: the first scenario involved a general weakness in the global economy such as electronic sector which was an important driver of Singapore economy; the second scenario assumed pressures from global economic weakness compounded by terrorism in the region. Banks have also used bottom-up approach in stress testing their corporate loan portfolio which the steps are shown in diagram 1(refer to appendix). Unlike consumer loan, stress testing in consumer loans were assessed using a top-down approach. An illustration can be found on figure 2 (refer to

FSAP has done stress testing which are targeting in Singapore’s banking sector, corporate loan and consumer loan. The above points are applicable to SBU as SBU is a private and personal banking which are operating in Singapore. The results from stress testing are to be manage properly under management of liquidity risk

Liquidity gap analysis: Gap analysis is a technique of asset liability management that can be used to assess interest rate risk and liquidity risk. In liquidity gap analysis, this method is used to calculate cash out-flows in bank has exceeds cash in-flow in a given time band. This technique aggregates various cash flows into their respective time frames (maturity bracket) and checks for cash flow in each bracket. An illustration of gap analysis is shown below in diagram 3 (refer to appendix)

The results will be positive or negative. It the results is negative, it means that it is possible for bank to have liquidity risk at that period of time. An example is shown on show gap analysis works at diagram. However, there is a flaw of gap analysis. It is the fact that it does not identify mismatches with buckets and more significant flaw will be it cannot handle options in a meaningful way. Regardless of that, it is still a positive method to measure liquidity