The Research Of Measurement And Management Of Liquidity Risk In Banking

Going with the high-speed development of finance, financial risk become more and more important, especially liquidity risk shows its great influence in recent crises. The collapse of Amaranth and the debacle of LTCM give us cruel lessons of failing in managing liquidity risk. Now in mainland of China, the capital market is growing very fast, the stocks prices fluctuate greatly, the overall price of houses is rising quickly, all of these are big challenges for banks, and from this we can see that liquidity risk managing is vital to the survival of financial institutions. And finding out how to measure liquidity risk will be helpful for the development of financial market.Measurement of liquidity risk is the base of sound practices of managing liquidity risk. However, an accurate measurement is the current challenge; there is no common standard on measuring and managing liquidity risk in both theory and practice. On the basis of the literature review, the article proceeds with three methods of liquidity risk measurement that is balance sheet liquidity analysis, cash capital position, maturity mismatch approach. The article also puts forward a qualitative framework for liquidity risk measurement, because liquidity risk is scenario-specific, in certain cases, a qualitative assessment is more important than a quantitative measurement.Stress testing of liquidity risk is very helpful for estimating the crises facing banks, analyzing the stability of banks in crises, making up for collecting data on measuring and managing liquidity risk. Banks of China must pay attention to stress testing. The article analyzes four cash flow drivers, especially the impact of interest rates and credit risk on liquidity needs, then introduces an example of a bank, elaborates the procedures of scenario analysis and stress testing.Today, a standard on measuring and managing liquidity risk has evolved among the major banks in United States and Europe. According the standard, requirements of BIS and Basel Accord, experiences of these major banks, the article proceeds with liquidity risk management tactics, board and management responsibilities, liquidity risk limits, reporting systems and internal control processes, and some suggestions in liquidity risk policies.