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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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    References listed on IDEAS

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    1. Viral V Acharya & Bruce Tuckman, 2014. "Unintended Consequences of LOLR Facilities: The Case of Illiquid Leverage," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 606-655, November.
    2. Zoltan Pozsar, 2013. "Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 22(5), pages 283-318, December.
    3. Hyun Song Shin, 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 101-119, Winter.
    4. Milne, Alistair & Wood, Geoffrey, 2008. "Shattered on the rock? British financial stability from 1866 to 2007," Bank of Finland Research Discussion Papers 30/2008, Bank of Finland.
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