Estimating liquidity risk using the exposure based cash flow at risk approach an application to the uk banking sector_accepted.pdf (392.68 kB)

Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector

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journal contribution
posted on 01.03.2017, 11:35 by Meilan Yan, Maximilian Hall, Paul Turner
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.

History

School

  • Business and Economics

Department

  • Economics

Published in

International Journal of Finance and Economics

Volume

19

Issue

3

Pages

225 - 238

Citation

YAN, M., HALL, M. and TURNER, P., 2014. Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector. International Journal of Finance and Economics, 19 (3), pp.225-238.

Publisher

© John Wiley & Sons

Version

AM (Accepted Manuscript)

Publisher statement

This is the peer reviewed version of the following article: YAN, M., HALL, M. and TURNER, P., 2014. Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector. International Journal of Finance and Economics, 19 (3), pp.225-238, which has been published in final form at https://doi.org/10.1002/ijfe.1495. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

Acceptance date

22/01/2014

Publication date

2014-03-14

Copyright date

2014

ISSN

1076-9307

eISSN

1099-1158

Language

en

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