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

Bruce Tuckman

Financial Markets, Institutions & Instruments, 2017, vol. 26, issue 3, 153-172

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.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wly:finmar:v:26:y:2017:i:3:p:153-172

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