Bank Funding Liquidity Risk paper

International Banking


Question 1. 3

Don't use plagiarized sources. Get Your Custom Essay on
 Bank Funding Liquidity Risk paper
Just from $9/Page
Order Essay

Bank Funding Liquidity Risk. 3

Measurement of Bank Funding Liquidity Risk. 3

Market Liquidity Risk. 4

Measurement of Market Liquidity Risk. 5

Question 2. 6

Interactions between Bank Funding Liquidity and Market Liquidity Based On the Dataset. 6

Ted Spread. 6

CDS. 8

Monthly Stock Return. 9

Conclusion. 10

References. 11

Question 1.

 Bank Funding Liquidity Risk

Funding liquidity risk has played an important role in all banking crises. However, a measure based on available data is indefinable. Aggressive bidding during central bank auctions shows the funding liquidity risk (Drehmann, 2010).

Bank of International Settlement helps to promote stability in the financial sector by analyzing the issues faced by authorities and thus enable it by setting an international standard. To carry out the banking supervision BIS has set up Basel Committee on Banking Supervision. Guidelines and standards issued by BCBS is known as Basel Accords. Till date, we have three BCBS Accords known as Basel I, Basel II and Basel III. Basel III Accords manages the liquidity risk and it also helps to strengthen the capital adequacy ratio. Basel III measures the funding liquidity risk. Under Basel III the standard of minimum liquidity is based upon two ratios- Liquidity Coverage Ratio and Net Stable Funding Ratio. While the minimum requirement of LCR is used to increase the bank’s ability to survive short term liquidity crunch, on the other hand, NSFR is used to uphold the flexibility for absorbing the shock in long term. After discussing the definition and the basic concepts of bank funding liquidity risk and market liquidity risk that have played a very important role in the global financial crisis of 2008, it is now important to understand how to measure these. The following section discusses how to measure bank funding liquidity risk and market liquidity risk.

Measurement of Bank Funding Liquidity Risk

Liquidity Coverage Ratio

According to BCBS the liquidity coverage ratio is calculated using the following formula

LCR= Stock of High Quality Liquid Assets/ Total NCO for the next 30 days.

LCR is required to be at least 100%.

Significance- Stock of liquid asset is divided into two parts:- level one and level two assets. While level one asset are those which are highly liquid, can be used as collateral during the time of borrowing from the central bank, easy to convert into cash. On the other hand level, two assets are less liquid. 15% discount rate is applicable on level two assets during the time of calculating LCR (Muskawa, 2013, p.10).

Net Stable Funding Ratio

Significance- According to Basel III Banks should have a minimum of 100% NSFR. It comprises of equity, demand deposits and preference stock.  Demand deposits can be divided into stable and less stable. The previous one can be defined as the deposit portion is expected to stay with the bank for a minimum one year.  Available amount of stable funding i.e. the numerator can be calculated as:- (summation of the total value of each funding source held* specific factor which are prescribed for each funding source).  In the equation of NFSR numerator relates to liabilities and denominator considers the assets. NSFR helps to endorse many more medium and long term funding for banks which will help the bank to survive liquidity crunch.  This can be achieved by the effect of NSFR by restraining the extent to which mismatch the duration in assets and liabilities possible by a bank (Muskawa, 2013, p.11).

Market Liquidity Risk

Market illiquidity has a positive effect on the surplus stock return of Treasury bill rate. This is responsible for the positive cross-sectional relation between illiquidity and stock return. If investors expect high market illiquidity then they will price the stock in such a way that they can generate high return. There can be three ways to measure market liquidity. The most important measure is the bid-ask spread method which is also known as width. When bid-ask spread is low or narrow then the market tends to produce more liquidity. In this context the term depth means the ability of the market to cope up with the selling of a position and the term resiliency means the ability of the market to regain its position from temporary incorrect price position.  Bid-ask spread analyzes the liquidity present in price dimension which is a feature of the market. Financial models, those deal with bid-ask spread is also deal with exogenous liquidity models.

Measurement of Market Liquidity Risk

Consider the situation where ask price of a single stock is $20.40 and the bid price is $19.60. We can take the spread in percentage terms = ($20.40 – $19.60)/$20 = 4%. The spread shows the round trip cost of buying and selling the particular stock. But we only want the liquidity cost if we need to sell off our position. Then the liquidity adjustment tends to add one-half the spread that is 0.5. In the case of VAR, we have to take the following formula-

The feature of the seller or the seller’s position depends on the position size relative to the market. Models which are used for this method measure liquidity from the dimension of quantity and also known as endogenous liquidity models. When an asset cannot be sold then it reduces its market price and can be illegible. Market liquidity risk is generated by the interaction between buyer and seller in the market. This is known as endogenous liquidity risk. If the buyers are absent from the market place then the risk will be known as exogenous liquidity risk. If the bid-ask spread is extremely high or low then that generates the market liquidity risk. Another model to measure market liquidity risk is model based on volume or transaction data. Berkowitz has invented the transaction regression model where he estimates that past trades have an impact on liquidity price.  There are other models like models based on limit order book data. Theoretical models like models based on optimal trading strategies. One important issue in market liquidity risk is to manage the market liquidity risk. Liquidity of an asset depends on the market condition. Thus an asset which near to mature and where profits come from dividend, interest rate coupon possess no risk.  But certain assets tend to be liquidated in nature. Trading book is an example of a liquid asset. From the point of view of risk-related measures, bank liquidity funding risk is a major component of probable liquidation. Financial organisations having an extreme requirement for cash or cash outflows will have to liquidate some portion of its assets. Thus a proper forecast and planning of funds required and risk measurement is the main step towards solvency risk management.

Question 2. Interactions between Bank Funding Liquidity and Market Liquidity Based On the Dataset

The financial market volatility in 2007 and 2008 led to the most serious financial crisis since there were in great depression and threatens present in the market. The outburst of housing bubble influences the banks to write down its several billion dollars as bad loans. Similarly, major shares of some major banks decline more than twice.  Here I have taken data from some handful of developed countries, for example, UK, US, Australia, etc. Advantages of choosing data of developed countries are that the data is reliable, accurate and genuine.

Sample Selection

In this study, I have selected Ted Spread, credit Default swaps, Stock Return Monthly from the given dataset to discuss the interactions of bank funding liquidity and market liquidity. The rationale for choosing these variables from dataset is justified and explained as follows-

Ted Spread

Ted spread can be defined as the difference between the interest rate on which US govt. borrows Treasury bill on a three months period of time and that rate at which banks lend money to each other for the duration of three months and this is measured by Libor. As the risk of defaulting a bank considered as higher than the defaulting probability of government. thus Ted spread states the risk that a bank creates on each other. Ted spread indicates the credit risk among interbank lending and health of the banking system. It also acts as an indicator which boosts the investor confidence on financial system and federal government.

Presentation of Result

Interpretations of Results

Ted spread is an indicator of credit risk. As the treasury bills are taken as risk free and on the other hand interbank interest rate is used to reflect the credit ratings of the borrowers. If the Ted spread increases, the default risk also tends to increase. Then investor will prefer to invest in safe instruments. If the spread decreases its mean that default risk is also decreasing. Here average of all major countries’ ted spread has been calculated and it is quite high at 161.94 which means that the default rate of the banks are high. Generally, ted spread should remain within 10 to 50 bps. But it is quite high. An increasing ted spread sometimes shows a probable downturn in US stock market as it means the liquidity is being reserved. In the above graphs we can see that ted spread is at 100 in 2011 but it had risen to 500-600 during 2008-09. Which indicates a higher liquidity crunch in the market.


Credit default swap is an agreement of financial swap that buyer of CDS will get compensation from the seller of CDS in case of loan default or credit event. The buyer of the CDS makes some payments known as CDS fee to the seller and in return receives a payment from the seller if the loan defaults.  If the loan defaults then the buyer receives compensation which is usually face value of the loan and seller takeover the default loan.

Presentation of Result

Interpretations of Results

CDs are the most important and widely used type of derivative and it plays a very significant role in world market. It offers protection against defaulting of unsecured corporate debt. Feature of typical CDS is that one party is agreed to sell protection to the other party. The buyer pays a CDS fee every year in a guarantee that if the bond or loan goes into default then the seller of the protection will compensate it to the buyer. Here average of CDs of all major countries has been calculated and it has come as 339.72. This means that the credit derivative purchase rate is higher. From Now from the graph of CDS it can be seen that CDS was high in between 2009-2011 at 500 bps but in 2011 it has reduced a little bit. It implies that the purchase rate of credit derivatives is low.

Monthly Stock Return

It means the average return of stock in month. It has a relationship with Bid-ask spread. Bid-Ask spread is the difference between the bid and offer rate stated by a dealer who participates in the market and bridge the gap between buying and selling. Bid ask spread can be viewed in a way that a dealer demands a price to provide more liquidity in the market. Over the long term, monthly stock return is not much variable.

Presentation of Result

Interpretations of findings

From the above graph we can see that the percentage of monthly stock return is very fluctuating. It was maximum at 0.8% in 2009 and minimum at -0.6% in 2008 which can also be considered as global financial crisis triggered from liquidity.


From the above study of bank funding liquidity risk and market liquidity risk, it can be concluded that a sudden explosive increase in mortgage is due to decline in prices of the housing estate. It was one of the main reasons for such a liquidity cruch in 2007 that continued till 2009. This crisis was closely related to bank liquidity crisis as evident from the Ted spread graph discussed earlier. The main effect of the crisis is that it causes liquidity crisis and many banks and financial institutions have faced obligations in their operations (Brunnermeier, 2009, p.98).


Muskawa, T., 2013.  Measuring Bank Funding Liquidity Risk. [online]. Available at: [Accessed on November 28, 2013].

Drehmann,  M., Nikolaou, K., 2010, Funding liquidity risk: definition and measurement.  [online]. Available at: [Accessed on November 28, 2013].

Brunnermeier, M., 2009. Deciphering the Liquidity and Credit Crunch 2007–2008. [Pdf]. Available at: https://mail  [Accessed on November 28,2013].

Amihud, Y.,`Mendelson, H., 1986. Liquidity and Stock Returns. [online]. Available at: [Accessed on November 28,2013].



Get Professional Assignment Help Cheaply

Buy Custom Essay

Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?

Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.

Why Choose Our Academic Writing Service?

  • Plagiarism free papers
  • Timely delivery
  • Any deadline
  • Skilled, Experienced Native English Writers
  • Subject-relevant academic writer
  • Adherence to paper instructions
  • Ability to tackle bulk assignments
  • Reasonable prices
  • 24/7 Customer Support
  • Get superb grades consistently

Online Academic Help With Different Subjects


Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.


Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.

Computer science

Computer science is a tough subject. Fortunately, our computer science experts are up to the match. No need to stress and have sleepless nights. Our academic writers will tackle all your computer science assignments and deliver them on time. Let us handle all your python, java, ruby, JavaScript, php , C+ assignments!


While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.


Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.


In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.


Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.


We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!


We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.


Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.

What discipline/subjects do you deal in?

We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.

Are your writers competent enough to handle my paper?

Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.

What if I don’t like the paper?

There is a very low likelihood that you won’t like the paper.

Reasons being:

  • When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
  • We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.

In the event that you don’t like your paper:

  • The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
  • We will have a different writer write the paper from scratch.
  • Last resort, if the above does not work, we will refund your money.

Will the professor find out I didn’t write the paper myself?

Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.

What if the paper is plagiarized?

We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.

When will I get my paper?

You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.

Will anyone find out that I used your services?

We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.

How our Assignment  Help Service Works

1.      Place an order

You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.

2.      Pay for the order

Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.

3.      Track the progress

You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.

4.      Download the paper

The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.

smile and order essaysmile and order essay PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!

order custom essay paper