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Survive the droughts, I wish you well: Principles and cases of liquidity risk management

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  • Bruce Tuckman

Abstract

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.

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  • Bruce Tuckman, 2017. "Survive the droughts, I wish you well: Principles and cases of liquidity risk management," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 26(3), pages 153-172, August.
    • Handle: RePEc:wly:finmar:v:26:y:2017:i:3:p:153-172
    DOI: 10.1111/fmii.12082
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