Glossary
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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A/D Ratio - Advances/deposit Ratio - The advances/deposit ratio is a measure of liquidity risk used by some banks. The volume of customer (usually retail customer) deposits is the denominator and the advances - or loans - granted to customers is the numerator. The ratio is a measure of core liquidity risk. This ratio gives a measure how the core customer base is being used to fund core assets. Several banks target a ratio of 1.00 for this ratio.
ALCO - Asset and liability committee - This is a senior management committee within a bank or financial institution which is responsible for coordinating the institution's borrowing and lending, liquidity risk management, funding strategy and balance sheet mix. Membership is usually comprised of suitable Board Members with either the CEO or CFO in the chair. This group is often responsible for monitoring and controlling interest rate risk components in the balance sheet.
ALM - Asset and liability management - The process of managing the risks which arise due to a mismatch between the assets and liabilities of the institution. In earlier usage this term was really used to discuss the interest rate components of mismatch. In the more recent past, the liquidity risk components of mismatch are now understood as included as well.
ANL -Available net liquidity - This is a concept for liquidity risk management now espoused by several banks. It refers to a short term liquidity risk management approach and focuses on the amount of available short term liquidity that can be generated by the banks balance sheet items as opposed to the volume of required liquidity from core activities.
Asset - This is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. In liquidity risk terms an asset is a balance sheet item that can be exchanged for available funds or liquidity - either at full value or for a discount after application of a liquidity haircut.
Asset monetisation factor - A term used to denote the extent to which any given asset can be exchanged for available funds or liquidity in the market. Usually expressed as a number of 1.00 or below, this factor depends on the discount or haircut that the marketplace would apply to the asset in exchange for liquidity.
CCO - Cumulative cash outflow - CCO is one measure used in liquidity risk management. It is the cumulative flow of cash (available funds) out of an institution as a result of the pattern of contractual obligations to acquire assets and repay liabilities in the future. It is used as a way of highlighting periods of marked liquidity risk increase in the future. It tends to be used by senior management as a strategic liquidity risk management tool.
CFP - Contingency funding plan - A plan or set of procedures which comes into effect in when internal or external circumstances are such as to threaten the liquidity position of an institution. Most CFP's are based on limited scenarios. Some institutions have different CFP's for different scenarios.
Collateral call liquidity risk - This is the risk that, as a result of mark-to-market or other contractual obligations, the institution is unable to meet collateral or cash collateral margin calls as they fall due. The liquidity risk component if often overlooked but may come about as a result of movements in markets. The risk is greater for institutions with substantial derivative books. This risk can also arise as a result of ratings triggers and the increased obligation to provide collateral following a downgrade.
Contingent assets - An asset in which the future economic benefit depends solely upon future events. Its value is not determined by known variables. In liquidity risk terms contingent assets are usually liquidity facilities bought in to protect the institution and provide a liquidity buffer in times of stress.
Contingent liabilities - An liability for which the future economic cost depends solely upon future events. Its value is not determined by known variables. In liquidity risk terms contingent liabilities are usually liquidity facilities sold to customers to provide a liquidity buffer in times of stress.
Contractual liquidity gap - The liquidity disposition calculated assuming that all assets and liabilities mature according to their contractual terms. This is a good approach to measuring liquidity risk except for those so called NoMAL items which lack a contractual term structure; i.e. retail current account liabilities.
Diversification - Diversification of liquidity sources is one of the principle tenets of liquidity risk management theory. For financial institutions such as banks this means ensuring that borrowings are diversified by contractual term, geography, investor type, instrument type and currency.
ELIA ratio - Enduring Liabilities : Illiquid Assets ratio - A proprietary liquidity risk measure developed by Liquidatum. ELIA measures the structural liquidity position of an institution under a given liquidity risk stress scenario. A ratio of 1.00 implies that that institution can fund its liabilities as they fall due under that scenario - without resort to behaviour that is not business-as-usual.
FTP - Funds transfer pricing - A mechanism for allocating and pricing liquidity within an institution. Most banks maintain an internal funds transfer-pricing system based on market rates with the aim of providing the correct incentives to operating units to utilise or originate liquidity. Liquidity is charged out at the appropriate short-term or long-term cost and credit is provided to originators of long-term stable funding.
Funding - Most practitioners would view funding as the same as liquidity provision. Often used in the longer term sense, or in respect of certificated liabilities in annual reports. Funding risk is viewed as a slightly longer-term or less immediate form of liquidity risk.
Funding risk - Funding risk is viewed as a slightly longer-term or less immediate form of liquidity risk. It is often used to denote a risk that certain normal funding channels, such as CP or bond issuance, might not be available in the required volumes.
Intraday liquidity risk - Intraday liquidity risk refers to the liquidity risk banks incur by their participation in clearing systems - either securities or derivatives settlement of central bank money clearing. Within these systems, major currency payment flows are monitored real time to ensure that there is sufficient collateral to make payments.
Liability - A liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other provision of economic benefits in the future. In liquidity risk terms a liability is a balance sheet item which gives rise to the obligation to provide available funds or liquidity.
Liquidity - The presence of immediately available funds. The highest form of liquidity is money on deposit with a central bank or lender of last resort. Some definitions mix this approach with the ability to convert as asset for cash, or immediately available funds, quickly.
Liquidity contingency risk - Some banks use this term rather than the more generic liquidity risk description. In general they are looking towards unexpected events or circumstances to give rise to shortfalls in liquidity.
Liquidity haircut - The proportion of an asset's face value that will not be realised in immediately available funds when liquidated prior to its contractual term. The term is mostly used in describing asset behaviour/attributes. In liability terms, it has been used to describe the stickiness of liabilities which remain on an institution's balance sheet during a liquidity stress.
Liquidity mismatch risk - Banks have been known to use this term for the risk that the amounts and/or timing of cash inflows and outflows will not coincide.
Liquidity risk - This is the risk that an institution does not have sufficient financial resources to meet its obligations as they fall due or cannot meet them except at excessive cost.
Liquidity scenario analysis - The process of modelling liquidity risk events of different types to assess the structural liquidity strength of an institution. Scenarios include institution specific events, such as a ratings change, and market wide events - such as the closure of certain funding channels for defined periods. Such analysis requires the presence of accurate and granular data regarding the contractual maturities of the institution's assets and liabilities - including off-balance sheet commitments.
Liquidity scenario stress testing - The process of modelling liquidity risk events of different types to assess the structural liquidity strength of an institution. Scenarios include institution specific events, such as a ratings change, and market wide events - such as the closure of certain funding channels for defined periods. Such analysis requires the presence of accurate and granular data regarding the contractual maturities of the institution's assets and liabilities - including off-balance sheet commitments.
LiqV - The most recent regulations established by the German regulatory authorities ( the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) ) in respect of "The Liquidity Regulation - Regulation on the liquidity of institutions". The LiqV replaces the old Grundsatz II obligations which regulated the extent to which institutions needed to hold core liquidity against their day-to-day operations.
Margin call liquidity risk - This is the risk that, as a result of mark-to-market or other contractual obligations, the institution is unable to meet collateral or cash collateral margin calls as they fall due. The liquidity risk component is often overlooked but may come about as a result of movements in markets. The risk is greater for institutions with substantial derivative books. This risk can also arise as a result of ratings triggers and the increased obligation to provide collateral following a downgrade.
Market liquidity risk - The extent to which an asset can be liquidated to raise immediately available funds is determined by market liquidity. This is the ability to sell or securitise an amount of an asset without significantly affecting that assets price. Market liquidity and liquidity risk are intertwined in scenarios/circumstances where asset market liquidity is disrupted.
MCO - Maximum cash outflow - MCO is one measure used in liquidity risk management. It is the limits set by institutional management for the flow of cash (available funds) out of an institution as a result of the pattern of contractual obligations to acquire assets and repay liabilities in the future. It is used as a way of limiting concentrations of outflow or liquidity utilisation. It tends to be used as a tactical liquidity risk management tool.
NoMAL- Non-maturing assets and liabilities - This is the term used to describe assets and liabilities whose contractual terms do not include a fixed maturity. These most often include current accounts and demand deposit accounts but can include items from the asset side, including overdrafts. Most banks model the behaviour of NoMAL items to give a behavioural maturity profile as opposed to a contractual behavioural profile.
Operational liquidity gap - The liquidity disposition calculated assuming that all assets and liabilities mature according to their normal behavioural characteristics. This is a good approach to measuring "business-as-usual" liquidity dispositions.
Operational liquidity risk - The liquidity disposition calculated assuming that all assets and liabilities mature according to their behavioural characteristics. This is a good approach to measuring liquidity risk under business as usual conditions where historical behavioural patterns can be used as a proxy for future behaviour.
Secured funding - Funding or liquidity sources that require the institution to provide some sort of real or promised security - such as liquid marketable securities. Secured funds also can include central bank deposits which have to be collateralised within the central bank money clearing system.
Sterling stock liquidity - This is the prime liquidity risk measure required of Sterling Stock Liquidity Banks under the UK FSA regime. The ratio is based on a numerator or liquid sterling assets and a denominator which includes the sum of 5% of retail deposits falling due in the next 5 working days and wholesale outflows for the next 5 days adjusted for a stock of sterling certificates of deposit held. It is the primary liquidity risk measure in for UK banks.
Transfer pricing - The price at which liquidity is passed from one department to another within financial institutions. This can apply to immediately available funds or term money. Often banks have a transfer pricing mechanism (FTP) which controls the price and flow of such monies. This can be achieved through a central hub - i.e. a Treasury - or through accounting treatments.
Treasurer - The individual responsible for the Treasury and the control of liquidity and capital resources.
Treasury - Literally defined as a store of treasure. Within a bank the Treasury is normally the operating units in control of liquidity and capital resources.
Unsecured funding - Funding or liquidity sources that do not require the institution to provide any security. These funds rely most particularly on the good name of and faith in, that institution.
Balance sheet And Liquidity Stress Analysis system
Designed by bank treasurers, BALSA gives you an external perspective on your relative liquidity risk profile and balance sheet structure.