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Estimating Liquidity Risk Using The Exposure-Based Cash-Flow-at-Risk Approach: An Application To the UK Banking Sector

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.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Yan_Hall_TurnerWP6.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2011_06.

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Date of creation: Nov 2011
Date of revision: Nov 2011
Handle: RePEc:lbo:lbowps:2011_06
Contact details of provider: Postal: Loughborough, Leicestershire, LE11 3TU
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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
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  1. Gupta, Anurag & Liang, Bing, 2005. "Do hedge funds have enough capital? A value-at-risk approach," Journal of Financial Economics, Elsevier, vol. 77(1), pages 219-253, July.
  2. Niclas Andrén & H�kan Jankensg�rd & Lars Oxelheim, 2005. "Exposure-Based Cash-Flow-at-Risk: An Alternative to VaR for Industrial Companies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(3), pages 76-86.
  3. Evert Wipplinger, 2007. "Philippe Jorion: Value at Risk – The New Benchmark for Managing Financial Risk," Financial Markets and Portfolio Management, Springer, vol. 21(3), pages 397-398, September.
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