Authors: Enzo Scannella
Addresses: Department of Economics, Business and Statistics, University of Palermo, Viale delle Scienze, 90128, Palermo, Italy
Abstract: Liquidity risk is now more important than it used to be in the past. The financial crisis has emphasised the importance of liquidity risk to the functioning of banking and financial system. The paper presents a theoretical and regulatory investigation of two types of liquidity risk: funding liquidity risk and market liquidity risk. The paper analyses the different approaches to measure the impact of funding and market liquidity risk in the economics and management of banks. The paper provides also an analysis of the organisational implications of the asset and liability management perspective of liquidity risk. Liquidity risk does not need to be covered by equity but by an adequate volume of liquid assets and highly liquid securities. This is the reason why the regulation of the liquidity risk in banking is focused on liquidity ratio-based financial constraints.
Keywords: liquidity risk management; bank liquidity; funding liquidity risk; market liquidity risk; liquidity ratios; stress test; financial regulation; banking supervision; asset management; liability management; banking industry; financial crisis; financial stability; Basel 3.
International Journal of Risk Assessment and Management, 2016 Vol.19 No.1/2, pp.4 - 21
Received: 20 Feb 2014
Accepted: 11 Apr 2014
Published online: 27 Jan 2016 *