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

Meilan Yan, Maximilian Hall and Paul Turner ()
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Meilan Yan: School of Business and Economics, Loughborough University, UK

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: 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.

Keywords: Liquidity risk; Exposure-based CFaR; Risk Management; Funding Pressure (search for similar items in EconPapers)
JEL-codes: C15 C22 C87 G21 G32 (search for similar items in EconPapers)
Date: 2011-11, Revised 2011-11
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: ESTIMATING LIQUIDITY RISK USING THE EXPOSURE‐BASED CASH‐FLOW‐AT‐RISK APPROACH: AN APPLICATION TO THE UK BANKING SECTOR (2014)
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