Advanced Bank Liquidity Stress: Testing & Management

Overview

This two-day programme provides a comprehensive, practical deep dive into bank liquidity risk, from the drivers of stress and regulatory requirements through to advanced modelling and scenario analysis.

It covers the full liquidity management toolkit, including stress testing of deposits, wholesale funding, off-balance-sheet exposures, central bank facilities, and derivative collateral requirements.

Participants will also examine contingency funding planning, KRIs, and funds transfer pricing, with a strong focus on how these tools work together in real-world banking environments.

Overall, the course offers a highly relevant, market-facing view of how banks can strengthen resilience, improve decision-making, and prepare for funding stress in a changing risk landscape.

Learning Objectives

Understand typical range of assumptions used by banks in scenario-based liquidity stress-testing of non-maturity deposits, off balance sheet facilities and derivative collateral posting requirements
Learn new advanced stochastic factor models for non-maturity deposits used by GSIBs as a complement to their scenario-based liquidity stress tests
Learn how perception of key creditors regarding bank’s forward-looking capital position ultimately drives liquidity stress and resolution risk and how banks can anticipate this
Learn typical CFP weakness in a world of resolution regimes
Learn best practice funds transfer pricing framework

Who the course is for

Liquidity risk analysts and liquidity risk modellers
Liquidity risk managers
ALCO and risk committee members
Treasurers and treasury staff members
FTP managers and staff members
Internal audit or risk control
External auditors and regulators

Day One

How Liquidity Risk Arises For Banks

Defining liquidity risk
Key sources of liquidity risk – maturity mismatch (in particular non-maturity deposits and short-term unsecured wholesale funding), derivative collateral posting requirements and off-balance sheet facilities
Fractional reserve banking and liquidity risk
Why perception of creditors (invested in write-downable capital instruments and in bail-inable liabilities) in respect of bank’s forward-looking capital position is key in triggering liquidity stress and resolution risk

Case Study 1 – Liquidity stress data across a range of European and US banks during 2007-09 financial crisis and for European banks during 2010-12 European peripheral sovereign and banking crisis

Case Study 2 – Liquidity stress at Silicon Valley Bank over 2022-23

Regulatory Liquidity Requirements

Liquidity Coverage Ratio (LCR) – rationale; calculation; implications for funds transfer pricing, funding mix, liquid assets buffer management
Net Stable Funding Ratio (NSFR) – rationale; calculation; treatment of derivatives; implications for funds transfer pricing, funding mix, business model choices

Case Study 3 – LCR and NSFR at Barclays

Liquidity Management Framework Overview

Specification of liquidity risk appetite (LRA)
Liquidity stress test – net cash flow projections, liquidity buffer, survival horizon
Contingency funding plan
Liquidity risk pricing – funds transfer pricing

Case Study 3 – Barclays – Liquidity management framework

Case Study 4 – Example liquidity stress test results template

Liquidity Stress-Testing

Liquidity stress-testing approaches – deterministic scenarios vs historic vs stochastic factor models. Regulatory expectations
Scenario construction and progression through severity levels
Linkages between capital and liquidity
Consolidated vs deconsolidated stress-testing – importance of different regulatory sub-groups and capital account restrictions for cross-border banking groups
Stress-testing steps

Stressing Non-Maturity Deposits (NMDs) & Time Deposits

How to segment deposits according to likely “stickiness” – balance proportion testing based on hypothesised segmentation criteria
Liquidity scoring and ranking of deposit segments
Why interest rate risk in banking book (IRRBB) NMD modelling does not work for liquidity stress-testing purposes

Case Study 5 – Historic deposit outflows at failed banks for benchmarking purposes

Case Study 6 – Illustrative scenario-based liquidity stress test of NMDs

Stochastic factor model of NMDs – making NMD volume a function of explanatory variables; allowing for non-linear depositor behaviour when certain threshold levels for explanatory variables are breaches
Using stochastic factor model as complement to scenario-based method

Case Study 7 – Stochastic factor model of NMDs driven by ratio of deposit rate to market rate and by bank’s credit default swap (CDS) level

Expanding stochastic factor model to other explanatory variables
Treatment of time deposits

Stressing Credit & Facility Drawdowns & Other Off-Balance Sheet Components

Key off balance sheet components contributing to liquidity stress – credit facilities, liquidity facilities, credit guarantees, undisbursed loan commitments, SIV / conduit support
Typical scenario-based assumptions and why quantitative approaches are not well suited

Case Study 8 – Illustrative scenario-based liquidity stress test of off-balance sheet

Wholesale Funding Stress

Types of wholesale funding – CP, CDs, interbank, repos, covered bonds, senior unsecured (preferred, non-preferred, holdco, opco)
Typical rollover / non-rollover assumptions in liquidity stress across range of senior unsecured and secured funding
Generating liquidity from self-held covered bond and ABS issuance

Case Study 9 – Wholesale funding stress at US and European banks during 2007-09 financial crisis and for European banks during 2010-12 European peripheral sovereign and banking crisis

Central Bank Liquidity Facilities

Overview of liquidity facilities and market operations of Federal Reserve, European Central Bank and Bank of England

Case Study 10 – Asset eligibility and haircuts for repo to ECB

Case Study 11 – Exceptional Liquidity Assistance (ELA) in euro-zone

Day 2

Derivatives Collateral Posting Requirements

Derivative collateral posting requirements – initial margin vs variation margin; collateral valuation changes; ratings downgrade triggers; derivative receivables and payables; how CSA and netting work; centrally vs non-centrally cleared derivatives
Initial margin / independent amount – central clearer calculation methodologies and bilateral SIMM
New regulatory requirements for initial margin
Central clearing
Collateral management – rehypothecation v segregation; “cheapest to deliver” collateral optionality; managing the liquidity buffer composition in different stress scenarios
Funding Value Adjustment (FVA) as a measure of the net cost of variation margin collateral posting

Case Study 12 – scenario based liquidity stress testing of derivative collateral posting requirements

Case Study 13 – using XVA infrastructure to liquidity stress test derivative collateral posting requirements

Funding Value Adjustment (FVA) and Margin Value Adjustment (MVA) as term liquidity premium for derivatives for FTP purposes

Case Study 14 – calculating FVA and MVA (also CVA and KVA for economic value added purposes)

Complete Liquidity Stress Test

Case Study 15 – Fully worked example of liquidity stress test, stressing deposits, off balance sheet and derivatives using both scenario and stochastic factor methods

Case Study 16 – Public information-based creditor stress test of bank’s capital and liquidity as key driver of likely liquidity stress and resolution risk

Contingency Funding Plan

Key Risk Indicators (KRIs) / early warning signals – number of KRIs, thresholds to trigger KRIs, selection of KRIs
Which KRIs tend to be most powerful in predicting liquidity stress?
Escalation process and crisis management committee

Case Study 16 – Example key KRIs and escalation process

Components of a strong contingency funding plan (CFP)
Linkage between stress tests and CFP
Key liquidity management tools in stress

Case Study 17 – Example CFPs and assessment thereof

Have CFPs been adequately adapted for today’s world of resolution regimes?

Case Study 18 – Intra-day liquidity risk

Funds Transfer Pricing

Why liquidity risk pricing through funds transfer pricing (FTP) is necessary
Dual FTP – term liquidity premium (TLP) vs liquidity premium (LP)
Distinguishing TLP from interest rate risk term premium (IRRTP) and relevance for pricing fixed vs floating rate assets and liabilities
Options for calculating FTP curve and consequences of choice made
Frequency of curve update
FTP of non-base currency assets and liabilities
Measuring LP across a range of contingent liquidity risks
Measuring TLP across demand deposits, customer loans, derivatives and bonds on trading book funded by repo

Case Study 19 – Implementing FTP at a Global Systemically Important Bank (GSIB) with significant investment banking operations – Barclays Plc

(Liquidity) FTP as a subset of full transfer pricing which is itself an input into economic value added (EVA) to measure the performance of business units after accounting for the full economic costs

Case Study 20 – What does a complete EVA framework look like