Liquidity risk – Basel III

What is liquidity risk?

In financial circles, the term liquidity is used in different contexts: as a measure of the convertibility of securities (into cash), as a description of the solvency of individual institutions and as the smooth flow of cash within a national economy.


The primary task of liquidity risk management in banks is to ensure solvency at all times by providing a liquidity reserve containing an adequate body of liquid securities i.e. securities that can easily be  converted into cash at any time. 


Is your liquidity reserve adequate? Do your stress scenarios meet economic and regulatory requirements? Is there a suitable method of allocating liquidity costs to products? What are the most common models and parameters for customer deposits? Our experts can advise you on all of these issues.

Liquidity risk and the regulatory environment

For some years, and especially in the wake of recent financial crises, the regulators have focused more sharply on the issue of liquidity risk. The current trend is shifting away from the internal models described in the opening clauses of LiqV (German liquidity regulations) towards the quantitative approaches laid out in Basel III. Even MaRisk (German minimum requirements for risk management) now contains concrete rules on the calculation of liquidity risk (e.g. combining the liquidity reserve with prolongation assumptions in stress cases).


The new Basel III rules in particular (and their provisional implementation based on numerous QIS) present many banks with a challenge. As well as problems of data availability (interest rates, collateralisation data, categorisation of customers), the focus is on issues of interpretation (operational/transactional, highly liquid) and the treatment of individual product categories (forward transactions, unsecured loans, collaterals).


How can Basel III data be meaningfully combined in a single data store? What is the definition of highly liquid securities? How much scope is there for interpretation of the LCR? If you would like to discuss these issues at greater length, please feel free to contact the experts at d-fine.

Support during implementation

Whether you need to introduce new liquidity risk management software, extend your existing systems to take account of Basel III and MaRisk requirements or implement a temporary 'quick-and-dirty' solution for QIS and EBA enquiries, you can rely on d-fine to support you from the initial rough draft and specification process through to implementation and testing. We have considerable experience of commercial software solutions, data modelling and system adaptation as well as in-house solutions. We have developed our own liquidity framework that already covers the Basel III rules. 


We provide one-stop support from the initial 'quick check', business analysis and industry-specific system design through to the selection of appropriate software, system roll-out and the definition of management reporting - all backed up by routine project management.


We are confident that you too can benefit from our experience in the areas of liquidity risk management.