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Survive the droughts, I wish you well: Principles and cases of liquidity risk management

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  • Bruce Tuckman

Abstract

Short‐term, liquid assets are highly valued by lenders, but pose liquidity risk management challenges to borrowers. Basic principles to meet those challenges are to conduct liquidity stress scenario analysis; to form business plans for each stress scenario; to hold enough capital to sustain the planned, post‐shock balance sheet; and to hold a large enough liquidity reserve to survive the transition from the pre‐ to the post‐shock balance sheet. Historical failures, like Northern Rock, Bear Stearns, and MF Global have a lot to teach about implementing these principles. While regulatory frameworks constrain liquidity positions, they are no substitute for firm‐specific liquidity risk management.

Suggested Citation

  • Bruce Tuckman, 2017. "Survive the droughts, I wish you well: Principles and cases of liquidity risk management," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 26(3), pages 153-172, August.
    • Handle: RePEc:wly:finmar:v:26:y:2017:i:3:p:153-172
    DOI: 10.1111/fmii.12082
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    References listed on IDEAS

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    1. Zoltan Pozsar, 2013. "Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 22(5), pages 283-318, December.
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    3. Milne, Alistair & Wood, Geoffrey, 2008. "Shattered on the rock? British financial stability from 1866 to 2007," Bank of Finland Research Discussion Papers 30/2008, Bank of Finland.
    4. Viral V Acharya & Bruce Tuckman, 2014. "Unintended Consequences of LOLR Facilities: The Case of Illiquid Leverage," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 606-655, November.
    5. Milne, Alistair & Wood, Geoffrey, 2008. "Shattered on the rock? : British financial stability from 1866 to 2007," Research Discussion Papers 30/2008, Bank of Finland.
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    Cited by:

    1. Niu, Jijun, 2024. "Liquidity hoarding and bank profitability: The role of economic policy uncertainty," Finance Research Letters, Elsevier, vol. 68(C).
    2. Theoharry Grammatikos & Nikolaos I. Papanikolaou, 2018. "“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 27(3), pages 89-121, August.

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