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International Banking - Essay Example
Finance & Accounting
Pages 8 (2008 words)
International Banking How to measure bank funding liquidity risk and market liquidity risk Banks over the years have been faced with crises emanating from various factors. A major player that has historically been associated with these crises is the funding liquidity risk…
Measuring bank liquidity risk incorporates the comparison of accumulated expected cash shortfalls for a given period of time with the stock available for funding the cash sources. In accounting, the stock or the asset available in an organization should always be sufficient to fund the financial sources. To measure this risk, the accountant is required to assign the anticipated cash flows to periods in the future that have financial products with unpredictable cash flow timings (Musakwa, 2013). It is important to note that there is no agreed criterion that can be used to assign the cash flows. In other words, there is no common consensus on how to carry out the procedures. The variations in measuring funding liquidity risk are normally caused by the considerations of solvency, immediacy, as well as the cost of obtaining liquidity. First, solvency can only be applied in firms that are solvent. It can be defined in terms of funding liquidity risk as the capability of a firm that is solvent to make the payments agreed upon in a timely manner. It should be noted that not only solvent banks that are liquid (Musakwa, 2013). At times, even insolvent banks may be liquid and this makes it difficult to use solvent as the main base for measuring banks liquidity risk. Further, a solvent bank can at times be illiquid. ...
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