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Liquidity risk

sipanivishal

Manager-Corporate Banking
Thread starter #1
Hi David,

In liquidity risk notes,you have mentioned two types of Liabilities.You have also mentioned examples with them.both has long term debt.Its a bit confusing.Can you explain each example.
What is liquidity premium on bank's marginal funding cost ?

Thanks
Sipani
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#3
Hi Sipani,

The liabilities are stable and volatile. As Culp says, stable liabilities are fairly predictable. So volatile liabilities tend to be interest rate sensitive or they are funds provided to the bank that can be withdrawn without much advance notice.

Re: the liquidity premium (you might notice in Culp), he doesn't go too far into it except to say it's a spread. It can be measured different ways, it's a non-trivial thing to capture. It could be the difference between the firm's long and short term rate. But I think Culp is fairly conceptual, noting it is captured by a "small increase in its [the firm's] spread over Treasuries."

Culp's examples here are U.S. Treasury securities (a call market, synchronous, at preestablished times) and foreign exchange markets (continuous, asynchronous). I don't think i can improve on Culp 424.

David
 
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