By Christian Schmaltz

ISBN-10: 3834918229

ISBN-13: 9783834918222

Internal liquidity versions for banks have won massive significance seeing that German regulators have determined to just accept them for regulatory reporting. Christian Schmaltz identifies product funds flows, investment unfold, investment skill, haircuts, and temporary rates of interest as key liquidity variables. Then, he assumes particular stochastic methods for the major variables resulting in a selected liquidity version. The modelling concentration lies at the product funds move that's defined by means of a jump-diffusion strategy. eventually, the writer applies the version to the allocation, inner pricing, and optimization of liquidity.

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The European Central Bank uses short-term rates and volumes to decide on liquidity interventions28 2. Unexpected cash flows usually materialize overnight The payment balance of the bank has to be cleared every day. Overnight deposits/loans are essential Money Market instruments. 3. Overnight is the shortest swappable interest rate maturity. It constitutes the ’zero’-point for interest rate management. A direct consequence is that interest rate maturity coincides with liquidity maturity for overnight transactions.

Bank D funds 10Y fixed-rate loans by 5Y-fixed rate bonds. For this reason, interest and liquidity position are open. 3 In Bank C, the liquidity position is closed (10Y) whereas the interest rate position (6M,10Y) is not. Bank C runs an interest rate, but not a liquidity risk. Bank B runs a liquidity risk (10Y against 5Y), but closed its interest rate position by choosing the same floating rates. In contrast to floating interest rates, floating spreads do not exist. They would be credit spreads that are reset before liquidity maturity.

Consequently, our analysis does not address implementation issues. 3 Objective and Proceeding The previous section argued that there is a need for complete, quantitative, internal bank liquidity models. We develop a model that satisfies all these criteria. Subsequently, we describe the steps taken to derive such a model. Chapter 2 studies the different concepts of liquidity. It provides an overview of what is understood by liquidity in the literature. Therefore, we discuss definitions, properties and particularities of each concept.

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