Liquidity risk is the level of risk that a bank can withstand without affecting a short-term debt or financial demands. It serves as a category of potential liability relative to a bank's earnings and capital. The level of this risk is based on a bank's inability to meet scheduled or unexpected obligations when they come due or arise. Assets like securities, bonds, commodities and more that cannot be sold quickly enough without impacting market price in times of stress, and trading in these instruments, will tip the scales for these banks and risk putting them in default of their government directives to meet their obligations.
Tracking liquidity risk provides a more accurate representation of assets and at least short-term liquidity and value of those assets - both of an organization and within different areas of business within an organization. For those institutions supervised by the Federal Reserve, liquidity risk data is part of its supervisory surveillance program - especially important during times of economic stress.
Although liquidity risk has always existed in banking, it has only been recently that it has been explicitly factored into a regulatory framework. Under Basel II/III, additional procedures have been implemented to improve liquidity stress testing procedures at institutions from an enterprise-wide, risk-management perspective.
The FR 2052a report, which we compile, collects quantitative information on selected assets, liabilities, funding activities and contingent liabilities on a consolidated basis and by a material entity subsidiary. The FR 2052a comprises sections covering broad funding classifications by product, outstanding balance and purpose, and segmented by a maturity date.
The Expected Shortfall (ES) files capture general market risk (roughly corresponding to the stress VaR component in Basel 2.5). Each risk factor is subject to a liquidity horizon scaling based on its liquidity profile (i.e., ease of unwinding the positions in a market without significant impact on transaction prices).
The Incremental Default Risk (IDR) profile is designed to capitalize the jump to default risk of debt (including sovereign) and equity trading positions. Securitization products are completely disallowed in internal model treatments.
Finally, there is a capital add-on based on stress testing and scenario analysis, which is designed to capture the risk of non-modelable risk factors (to be elaborated next).
vertiv helps collects data from within your different business areas as reported through the FR 2052a report. FR 2052a reporting requirements change frequently, and vertiv tracks them as they occur and extrapolates the necessary information to provide you and the required reporting agencies with the information needed and required.