The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk
Liquidity and solvency have been called the "heavenly twins" of banking (Goodhart, Charles, 'Liquidity Risk Management', Financial Stability Review -- Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since...
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| Format: | Policy Research Working Paper |
| Language: | English |
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2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20091124162523 http://hdl.handle.net/10986/4331 |
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okr-10986-4331 |
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oai_dc |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
ACCOUNTING ALTERNATIVE INVESTMENTS AMORTIZATION ASSET PRICE ASSET PRICES ASSET VALUES ASSET-LIABILITY MANAGEMENT ASSETS RATIO ASYMMETRIC INFORMATION AUCTIONS BAILOUTS BALANCE SHEET BALANCE SHEET RATIOS BANK ASSETS BANK BALANCE SHEET BANK BRANCHES BANK CREDITORS BANK DEPOSIT BANK DEPOSITS BANK LIQUIDITY BANK MARKET BANKING INSTITUTION BANKING INSTITUTIONS BANKING SYSTEM BANKING SYSTEMS BANKRUPTCY BID BORROWING CAPACITY BROKERS BUSINESS CYCLE CAPITAL BASE CAPITAL MARKETS CASH FLOW CASH FLOWS CASH INFLOWS CASH OUTFLOWS CDS CENTRAL BANK CENTRAL BANKS COLLATERAL COLLATERAL RISKS COLLATERALIZATION COLLECTIVE ACTION COLLECTIVE ACTION PROBLEM COMMERCIAL BANKS COMMERCIAL PAPER COMMODITY PRICES COMPETITIVE MARKETS CONTINGENT LIABILITIES CORPORATE BORROWERS CREDIT CARDS CREDIT EXPANSION CREDIT LINES CREDIT QUALITY CREDIT RISK CREDIT RISKS CREDIT STANDING CREDITOR CREDITORS CRISIS COUNTRIES CURRENCY CURRENCY BOARD CURRENCY BOARDS CURRENCY MISMATCHES DEFAULTS DEFICITS DEGREE OF LIQUIDITY DEPOSIT DEPOSIT ACCOUNTS DEPOSIT INSURANCE DEPOSITORS DEPOSITS DERIVATIVES DERIVATIVES MARKETS DOMESTIC BANKING DOMESTIC BANKS DOMESTIC CURRENCY EQUITIES EQUITY CAPITAL EQUITY INDEXES EXCESS LIQUIDITY EXCHANGE RATE EXTERNAL BORROWING FACE VALUE FAIR PRICES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PERFORMANCE FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL SYSTEMS FOREIGN BANKS FOREIGN CURRENCIES FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FOREIGN EXCHANGE RISKS GOVERNMENT DEBT GOVERNMENT PAPER GOVERNMENT SECURITIES HOLDING HOLDINGS HOME CURRENCY ILLIQUID MARKETS ILLIQUIDITY INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION SYSTEMS INSIDER TRADING INSTITUTIONAL FUNDS INSTRUMENT INSURANCE COMPANIES INTEREST RATE INTEREST RATE RISK INTERNATIONAL BANK INTERNATIONAL SETTLEMENTS INVESTING INVESTMENT ALTERNATIVES INVESTMENT VEHICLES LENDER LENDER OF LAST RESORT LENDER-OF-LAST-RESORT LENDERS LEVEL OF INTEREST RATES LIABILITY LIABILITY MANAGEMENT LIABILITY SIDE LIABILITY SIDES LINES OF CREDIT LIQUID ASSETS LIQUIDATION LIQUIDITY LIQUIDITY CRISIS LIQUIDITY MANAGEMENT LIQUIDITY POSITION LIQUIDITY POSITIONS LIQUIDITY PROBLEM LIQUIDITY PROBLEMS LIQUIDITY RATIO LIQUIDITY RATIOS LIQUIDITY RISK LIQUIDITY RISKS LOAN LOCAL MARKET LOSS OF CONFIDENCE MACROECONOMIC POLICIES MARK-TO-MARKET MARKET ACCESS MARKET BORROWING MARKET BORROWINGS MARKET CONDITIONS MARKET CONFIDENCE MARKET DEPTH MARKET DEVELOPMENTS MARKET INTEREST RATES MARKET LIQUIDITY MARKET MAKER MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET SHARE MARKET-MAKING MATURITIES MATURITY MATURITY DATE MATURITY DATES MATURITY MISMATCH MATURITY MISMATCHES MATURITY TRANSFORMATION MATURITY TRANSFORMATIONS MONETARY POLICY MONEY MARKET MONEY MARKETS MORAL HAZARD MORTGAGES OPEN MARKET PAYMENT SYSTEMS PENSION PENSION FUNDS POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PORTFOLIOS PREPAYMENT PREPAYMENT OPTIONS PRICE VOLATILITY PRIVATE SECTOR CREDIT QUALITY OF ASSET QUALITY OF ASSETS REPAYMENTS RESERVE RESERVE REQUIREMENTS RESERVES RETURN RETURN ON ASSETS RETURNS RISK MANAGEMENT RISK MEASUREMENT RISK PROFILE RISK SHARING SAFETY NET SECURITIES SECURITIES MARKETS SETTLEMENT SETTLEMENT SYSTEMS SHAREHOLDERS SHORT-TERM ASSETS SHORT-TERM BORROWING SHORT-TERM BORROWINGS SMALL BUSINESSES SOLVENCY SUPERVISORY AGENCIES SUPERVISORY AGENCY SWAP T-BILLS TAX TERM DEPOSITS TIME DEPOSITS TRADING TRANSACTION TREASURIES TREASURY TREASURY BONDS TREASURY SECURITIES TRUST FUNDS TURNOVER TYPE OF INVESTORS UNDERLYING ASSETS VALUATION WITHDRAWAL WITHDRAWAL OF FUNDS |
| spellingShingle |
ACCOUNTING ALTERNATIVE INVESTMENTS AMORTIZATION ASSET PRICE ASSET PRICES ASSET VALUES ASSET-LIABILITY MANAGEMENT ASSETS RATIO ASYMMETRIC INFORMATION AUCTIONS BAILOUTS BALANCE SHEET BALANCE SHEET RATIOS BANK ASSETS BANK BALANCE SHEET BANK BRANCHES BANK CREDITORS BANK DEPOSIT BANK DEPOSITS BANK LIQUIDITY BANK MARKET BANKING INSTITUTION BANKING INSTITUTIONS BANKING SYSTEM BANKING SYSTEMS BANKRUPTCY BID BORROWING CAPACITY BROKERS BUSINESS CYCLE CAPITAL BASE CAPITAL MARKETS CASH FLOW CASH FLOWS CASH INFLOWS CASH OUTFLOWS CDS CENTRAL BANK CENTRAL BANKS COLLATERAL COLLATERAL RISKS COLLATERALIZATION COLLECTIVE ACTION COLLECTIVE ACTION PROBLEM COMMERCIAL BANKS COMMERCIAL PAPER COMMODITY PRICES COMPETITIVE MARKETS CONTINGENT LIABILITIES CORPORATE BORROWERS CREDIT CARDS CREDIT EXPANSION CREDIT LINES CREDIT QUALITY CREDIT RISK CREDIT RISKS CREDIT STANDING CREDITOR CREDITORS CRISIS COUNTRIES CURRENCY CURRENCY BOARD CURRENCY BOARDS CURRENCY MISMATCHES DEFAULTS DEFICITS DEGREE OF LIQUIDITY DEPOSIT DEPOSIT ACCOUNTS DEPOSIT INSURANCE DEPOSITORS DEPOSITS DERIVATIVES DERIVATIVES MARKETS DOMESTIC BANKING DOMESTIC BANKS DOMESTIC CURRENCY EQUITIES EQUITY CAPITAL EQUITY INDEXES EXCESS LIQUIDITY EXCHANGE RATE EXTERNAL BORROWING FACE VALUE FAIR PRICES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PERFORMANCE FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL SYSTEMS FOREIGN BANKS FOREIGN CURRENCIES FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FOREIGN EXCHANGE RISKS GOVERNMENT DEBT GOVERNMENT PAPER GOVERNMENT SECURITIES HOLDING HOLDINGS HOME CURRENCY ILLIQUID MARKETS ILLIQUIDITY INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION SYSTEMS INSIDER TRADING INSTITUTIONAL FUNDS INSTRUMENT INSURANCE COMPANIES INTEREST RATE INTEREST RATE RISK INTERNATIONAL BANK INTERNATIONAL SETTLEMENTS INVESTING INVESTMENT ALTERNATIVES INVESTMENT VEHICLES LENDER LENDER OF LAST RESORT LENDER-OF-LAST-RESORT LENDERS LEVEL OF INTEREST RATES LIABILITY LIABILITY MANAGEMENT LIABILITY SIDE LIABILITY SIDES LINES OF CREDIT LIQUID ASSETS LIQUIDATION LIQUIDITY LIQUIDITY CRISIS LIQUIDITY MANAGEMENT LIQUIDITY POSITION LIQUIDITY POSITIONS LIQUIDITY PROBLEM LIQUIDITY PROBLEMS LIQUIDITY RATIO LIQUIDITY RATIOS LIQUIDITY RISK LIQUIDITY RISKS LOAN LOCAL MARKET LOSS OF CONFIDENCE MACROECONOMIC POLICIES MARK-TO-MARKET MARKET ACCESS MARKET BORROWING MARKET BORROWINGS MARKET CONDITIONS MARKET CONFIDENCE MARKET DEPTH MARKET DEVELOPMENTS MARKET INTEREST RATES MARKET LIQUIDITY MARKET MAKER MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET SHARE MARKET-MAKING MATURITIES MATURITY MATURITY DATE MATURITY DATES MATURITY MISMATCH MATURITY MISMATCHES MATURITY TRANSFORMATION MATURITY TRANSFORMATIONS MONETARY POLICY MONEY MARKET MONEY MARKETS MORAL HAZARD MORTGAGES OPEN MARKET PAYMENT SYSTEMS PENSION PENSION FUNDS POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PORTFOLIOS PREPAYMENT PREPAYMENT OPTIONS PRICE VOLATILITY PRIVATE SECTOR CREDIT QUALITY OF ASSET QUALITY OF ASSETS REPAYMENTS RESERVE RESERVE REQUIREMENTS RESERVES RETURN RETURN ON ASSETS RETURNS RISK MANAGEMENT RISK MEASUREMENT RISK PROFILE RISK SHARING SAFETY NET SECURITIES SECURITIES MARKETS SETTLEMENT SETTLEMENT SYSTEMS SHAREHOLDERS SHORT-TERM ASSETS SHORT-TERM BORROWING SHORT-TERM BORROWINGS SMALL BUSINESSES SOLVENCY SUPERVISORY AGENCIES SUPERVISORY AGENCY SWAP T-BILLS TAX TERM DEPOSITS TIME DEPOSITS TRADING TRANSACTION TREASURIES TREASURY TREASURY BONDS TREASURY SECURITIES TRUST FUNDS TURNOVER TYPE OF INVESTORS UNDERLYING ASSETS VALUATION WITHDRAWAL WITHDRAWAL OF FUNDS Montes-Negret, Fernando The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| geographic_facet |
The World Region The World Region |
| relation |
Policy Research working paper ; no. WPS 5139 |
| description |
Liquidity and solvency have been called
the "heavenly twins" of banking (Goodhart,
Charles, 'Liquidity Risk Management', Financial
Stability Review -- Special Issue on Liquidity, Banque de
France, No. 11, February, 2008). Since these
"twins" interact in complex ways, it is difficult
-- particularly at times of crisis--to distinguish between
them, especially in the presence of information asymmetries
(Information asymmetry occurs when one party has more or
better information than the other, creating an imbalance of
power, giving rise to adverse selection and moral hazard ).
An insolvent bank can be liquid or illiquid, and a solvent
bank may be at times illiquid. In the latter case,
insolvency is not far away, since banking is grounded in
information and confidence, and it is confidence which in
the end determines liquidity. In other words, liquidity is
very much endogenous, determined by the general condition of
a bank, as well as the perception of it by the public and
market participants. Dealing with liquidity risk is more
challenging than dealing with other risks, since liquidity
is the result of all the operations of a bank and it is
fundamentally a relative concept which compares segments of
the balance sheet on the asset and liability sides. It does
not deal with absolutes, like arguably the concept of
capital and it explains why there is not an internationally
recognized "Liquidity Accord". This Working Paper
addresses key concepts like market and funding liquidity and
basic tools to address liquidity issues like cash flows,
liquidity gaps and some selected financial ratios. It aims
at providing an introductory guide to risk assessment and
management, and provides useful and practical guidelines to
undertake liquidity assessments which could prove useful in
preparing Financial Assessment Programs (FSAPS) in member
countries of the Bretton Woods institutions. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Montes-Negret, Fernando |
| author_facet |
Montes-Negret, Fernando |
| author_sort |
Montes-Negret, Fernando |
| title |
The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| title_short |
The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| title_full |
The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| title_fullStr |
The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| title_full_unstemmed |
The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk |
| title_sort |
heavenly liquidity twin : the increasing importance of liquidity risk |
| publishDate |
2012 |
| url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20091124162523 http://hdl.handle.net/10986/4331 |
| _version_ |
1764390959786754048 |
| spelling |
okr-10986-43312021-04-23T14:02:17Z The Heavenly Liquidity Twin : The Increasing Importance of Liquidity Risk Montes-Negret, Fernando ACCOUNTING ALTERNATIVE INVESTMENTS AMORTIZATION ASSET PRICE ASSET PRICES ASSET VALUES ASSET-LIABILITY MANAGEMENT ASSETS RATIO ASYMMETRIC INFORMATION AUCTIONS BAILOUTS BALANCE SHEET BALANCE SHEET RATIOS BANK ASSETS BANK BALANCE SHEET BANK BRANCHES BANK CREDITORS BANK DEPOSIT BANK DEPOSITS BANK LIQUIDITY BANK MARKET BANKING INSTITUTION BANKING INSTITUTIONS BANKING SYSTEM BANKING SYSTEMS BANKRUPTCY BID BORROWING CAPACITY BROKERS BUSINESS CYCLE CAPITAL BASE CAPITAL MARKETS CASH FLOW CASH FLOWS CASH INFLOWS CASH OUTFLOWS CDS CENTRAL BANK CENTRAL BANKS COLLATERAL COLLATERAL RISKS COLLATERALIZATION COLLECTIVE ACTION COLLECTIVE ACTION PROBLEM COMMERCIAL BANKS COMMERCIAL PAPER COMMODITY PRICES COMPETITIVE MARKETS CONTINGENT LIABILITIES CORPORATE BORROWERS CREDIT CARDS CREDIT EXPANSION CREDIT LINES CREDIT QUALITY CREDIT RISK CREDIT RISKS CREDIT STANDING CREDITOR CREDITORS CRISIS COUNTRIES CURRENCY CURRENCY BOARD CURRENCY BOARDS CURRENCY MISMATCHES DEFAULTS DEFICITS DEGREE OF LIQUIDITY DEPOSIT DEPOSIT ACCOUNTS DEPOSIT INSURANCE DEPOSITORS DEPOSITS DERIVATIVES DERIVATIVES MARKETS DOMESTIC BANKING DOMESTIC BANKS DOMESTIC CURRENCY EQUITIES EQUITY CAPITAL EQUITY INDEXES EXCESS LIQUIDITY EXCHANGE RATE EXTERNAL BORROWING FACE VALUE FAIR PRICES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PERFORMANCE FINANCIAL STABILITY FINANCIAL SYSTEM FINANCIAL SYSTEMS FOREIGN BANKS FOREIGN CURRENCIES FOREIGN EXCHANGE FOREIGN EXCHANGE MARKETS FOREIGN EXCHANGE RISKS GOVERNMENT DEBT GOVERNMENT PAPER GOVERNMENT SECURITIES HOLDING HOLDINGS HOME CURRENCY ILLIQUID MARKETS ILLIQUIDITY INFORMATION ASYMMETRIES INFORMATION ASYMMETRY INFORMATION SYSTEMS INSIDER TRADING INSTITUTIONAL FUNDS INSTRUMENT INSURANCE COMPANIES INTEREST RATE INTEREST RATE RISK INTERNATIONAL BANK INTERNATIONAL SETTLEMENTS INVESTING INVESTMENT ALTERNATIVES INVESTMENT VEHICLES LENDER LENDER OF LAST RESORT LENDER-OF-LAST-RESORT LENDERS LEVEL OF INTEREST RATES LIABILITY LIABILITY MANAGEMENT LIABILITY SIDE LIABILITY SIDES LINES OF CREDIT LIQUID ASSETS LIQUIDATION LIQUIDITY LIQUIDITY CRISIS LIQUIDITY MANAGEMENT LIQUIDITY POSITION LIQUIDITY POSITIONS LIQUIDITY PROBLEM LIQUIDITY PROBLEMS LIQUIDITY RATIO LIQUIDITY RATIOS LIQUIDITY RISK LIQUIDITY RISKS LOAN LOCAL MARKET LOSS OF CONFIDENCE MACROECONOMIC POLICIES MARK-TO-MARKET MARKET ACCESS MARKET BORROWING MARKET BORROWINGS MARKET CONDITIONS MARKET CONFIDENCE MARKET DEPTH MARKET DEVELOPMENTS MARKET INTEREST RATES MARKET LIQUIDITY MARKET MAKER MARKET PARTICIPANTS MARKET PLAYERS MARKET PRICES MARKET SHARE MARKET-MAKING MATURITIES MATURITY MATURITY DATE MATURITY DATES MATURITY MISMATCH MATURITY MISMATCHES MATURITY TRANSFORMATION MATURITY TRANSFORMATIONS MONETARY POLICY MONEY MARKET MONEY MARKETS MORAL HAZARD MORTGAGES OPEN MARKET PAYMENT SYSTEMS PENSION PENSION FUNDS POLICY RESPONSES POLITICAL ECONOMY PORTFOLIO PORTFOLIOS PREPAYMENT PREPAYMENT OPTIONS PRICE VOLATILITY PRIVATE SECTOR CREDIT QUALITY OF ASSET QUALITY OF ASSETS REPAYMENTS RESERVE RESERVE REQUIREMENTS RESERVES RETURN RETURN ON ASSETS RETURNS RISK MANAGEMENT RISK MEASUREMENT RISK PROFILE RISK SHARING SAFETY NET SECURITIES SECURITIES MARKETS SETTLEMENT SETTLEMENT SYSTEMS SHAREHOLDERS SHORT-TERM ASSETS SHORT-TERM BORROWING SHORT-TERM BORROWINGS SMALL BUSINESSES SOLVENCY SUPERVISORY AGENCIES SUPERVISORY AGENCY SWAP T-BILLS TAX TERM DEPOSITS TIME DEPOSITS TRADING TRANSACTION TREASURIES TREASURY TREASURY BONDS TREASURY SECURITIES TRUST FUNDS TURNOVER TYPE OF INVESTORS UNDERLYING ASSETS VALUATION WITHDRAWAL WITHDRAWAL OF FUNDS Liquidity and solvency have been called the "heavenly twins" of banking (Goodhart, Charles, 'Liquidity Risk Management', Financial Stability Review -- Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since these "twins" interact in complex ways, it is difficult -- particularly at times of crisis--to distinguish between them, especially in the presence of information asymmetries (Information asymmetry occurs when one party has more or better information than the other, creating an imbalance of power, giving rise to adverse selection and moral hazard ). An insolvent bank can be liquid or illiquid, and a solvent bank may be at times illiquid. In the latter case, insolvency is not far away, since banking is grounded in information and confidence, and it is confidence which in the end determines liquidity. In other words, liquidity is very much endogenous, determined by the general condition of a bank, as well as the perception of it by the public and market participants. Dealing with liquidity risk is more challenging than dealing with other risks, since liquidity is the result of all the operations of a bank and it is fundamentally a relative concept which compares segments of the balance sheet on the asset and liability sides. It does not deal with absolutes, like arguably the concept of capital and it explains why there is not an internationally recognized "Liquidity Accord". This Working Paper addresses key concepts like market and funding liquidity and basic tools to address liquidity issues like cash flows, liquidity gaps and some selected financial ratios. It aims at providing an introductory guide to risk assessment and management, and provides useful and practical guidelines to undertake liquidity assessments which could prove useful in preparing Financial Assessment Programs (FSAPS) in member countries of the Bretton Woods institutions. 2012-03-19T19:14:08Z 2012-03-19T19:14:08Z 2009-11-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20091124162523 http://hdl.handle.net/10986/4331 English Policy Research working paper ; no. WPS 5139 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region |