Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector
Meilan Yan
Maximilian Hall
Paul Turner
2134/24255
https://repository.lboro.ac.uk/articles/journal_contribution/Estimating_liquidity_risk_using_the_exposure-based_cash-flow-at-risk_approach_an_application_to_the_UK_banking_sector/9491348
This paper uses a relatively new quantitative model for estimating UK banks’ liquidity risk. The model is called the exposure-based
cash-flow-at-risk (CFaR) model, which not only measures a bank’s liquidity risk tolerance but also helps to improve
liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997–2010,
we provide evidence that there is variable funding pressure across the UK banking industry,which is forecasted to be slightly illiquid
with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC
maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC’s cash flow will drop below
£0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash
outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB’s cash flow is the most volatile of the six
biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow.
2017-03-01 11:35:08
Liquidity risk
Exposure-based CFaR
Risk management
Funding pressure
Economics not elsewhere classified