Liquidity risk for banks mainly manifests on account of the following:
Market liquidity risk: The risk that a bank cannot easily offset or eliminate a position at the prevailing market price because of inadequate market depth or market disruption. Though the importance of liquidity risk is well recognized, it eludes a comprehensive definition. The term liquidity is used across the mar-ket for different purposes, which means that Liquidity Risk itself is defined dif-ferently and depends very much on the context in which it is used. Liquidity risk is sometimes referred to as inability of the bank to convert an asset into cash at a reasonable time at a specific price. The cash position of the firm is an important …show more content…
• A bank’s liquidity management process should be sufficient to meet its fun ding needs and cover both expected and unexpected deviations from normal operations.
• A bank should incorporate liquidity costs, benefits and risks in internal pric-ing, performance measurement and new product approval process for all sig-nificant business activities.
• A bank should actively monitor and manage liquidity risk exposure and fund-ing needs within and across legal entities, business lines and currencies, tak-ing into account legal, regulatory and operational limitations to transferability of liquidity.
A bank should establish a funding strategy that provides effective diversifica-tion in the source and tenor of funding, and maintain ongoing presence in its chosen funding markets and counterparties, and address inhibiting factors in this regard.
• Senior management should ensure that market access is being actively managed, monitored, and tested by the appropriate staff.
• A bank should identify alternate sources of funding that strengthen its ca-pacity to withstand a variety of severe bank-specific and market-wide liquidity …show more content…
Operational risk is a financial institution's exposure to losses arising from mistakes (such as computer fail-ure or breach of regulations) and conspiracies (including loan fraud and em-bezzlement) that affect its day-to-day business.
Banks generally calculate their operational-risk cover by estimating the prob-ability that a particular event might occur and the resulting financial loss — such as the fine for breaking a rule or the sum pocketed by an embezzler. But operational crises also upset shareholders and can lead to a decline in mar-ket value.
Few institutions, however, factor such potential market losses into their risk-cover calculations or operational-risk-management plans. New research sug-gests that they should. The decline in market value following an operational crisis can be far greater than the financial loss. The first step for banks will be to measure and understand the full extent of their operational