The liquidity crisis of 2007/2008. Lessons for the management of liquidity risk

It is a paradox that the 2007 credit and liquidity crisis has amplified during 2008 up to an almost systemic crisis, transmitted to all economy, when the regulators had integrated financial stabilization as a major goal and promoted a better appraisal and monitoring of risks by banks, implying standardization of valuation methods and risk management practices. We wish to address this issue and from a microanalysis of a significant European actor's situation, we intend to show that a dynamic process of assets and liabilities management must generate the liquidity supply needed to fuel the bank's operations, since the crisis has demonstrated that banks can no more rely on markets to restore their liquidity in adverse cycle. In a fist section we will analyze the liquidity aspect of the crisis which we consider as the major transmission factor from the US mortgage market to the whole financial system in USA and Europe. In the second one we shall focus on the role of securitization and financial innovation in this liquidity crisis. In the third section, we will consider how this crisis has changed liquidity management for a bank, present the new liquidity ratii and finally discuss their adequacy for monitoring liquidity risk in the future.