ABCP see asset-backed commercial paper
ABSs see asset-backed securities
accounting standards 967, 419–21, 542–3
see also FAS …; IAS …
accrued interest 132–3, 410–19, 475–91
acronym mysteries 8
‘affine correlation’ 222, 340–1
AFS see available for sale assets
AIG see American International Group
aircraft leases 8
ALM see asset–liability management
American Home Mortgage Investment Corp. 3
American International Group (AIG) 6, 35, 36–7
amortizing swaps 281–8, 293–6, 371–2, 375–8, 518–37
amount dimension, taxonomy of cash flows 111–13, 118–41
analytical approximations for ELoP 296–9, 301–3, 373–81
arbitrage 27, 40–1, 47, 58–9, 80–1, 83–4, 319–20, 476–83, 492–9
arbitrage-free pricing, derivatives 476–83, 492–9
arctangent function 278
Aristotle 396
ASF see available stable funding
asset markets 21–32, 38–9, 49–50, 75–81, 111–15, 119–34, 144–98, 425–71, 477–537, 539
asset separation resolution tools 42
asset-backed commercial paper (ABCP) 3, 6, 9, 26, 61–2, 82–4, 99, 103–6, 197–8
asset-backed securities (ABSs) 4, 6, 8, 15, 61–2, 64–5, 67–8, 76–9, 82–4, 99, 103–6, 126–7, 197–8
see also mortgage-backed …; securitizations
collateral pledges 126
definition 8
asset–liability management (ALM) 88, 278–337, 389–423, 425–31, 456–71, 539–45
see also long-term …
conclusions and future prospects 543–5
asset–liability maturity mismatch 25, 38–9, 47, 48–50, 52–3, 63–8, 94–5, 99, 105, 107, 122–3, 145–68, 174–5, 197–8, 316–17, 468–71
asset–swap spreads (ASWs) 544–5
ASWs see asset–swap spreads
asymmetric information 7–9, 24–6, 29, 31–2, 33–45, 69, 71–4, 75–6, 186, 542–5
auctions, refi rates 18
available liquidity (AVL) 145–69, 172–85, 523–4, 533, 535
available for sale assets (AFS) 125–34
available stable funding (ASF) 66–8
available unencumbered assets, definition 68–9
backward recursion 477–91, 512–13
Bagehot's view 30
bAJD see basic affine jump diffusion model
balance sheet liquidity (BSL) 124–5, 127–34, 141, 144, 224–47, 543–5
‘balance sheet neutral’ repo transactions 124–7
balance sheets 27–32, 38–9, 43–4, 48–74, 75–97, 115, 119–41, 144–98, 224–47, 322–7, 389–401, 404–23, 425–71, 539–45
see also liquidity generation capacity
expansion/shrinkage tools 124–34, 158–62
mark-to-market valuations 27–8, 197–8, 374–8, 389–97, 401, 407–19, 421–3, 456–7, 543
Balkanization 58
bank activity benefits 24–5, 431–2
Bank of Canada 15
Bank of England 11, 15, 41, 68
Bank of Finland 42
bank franchises, DVA replication 415–19
bank incentives 28
Bank of Japan 15
bank lending channel, securitizations 84
bank loans 6, 18, 24–6, 33–45, 112–15, 119–23, 162–3, 192–4, 223–4, 257–70, 337–70, 386–423, 425–71, 477–537, 542–5
behavioural models 337–70, 545
funding costs included in loan pricing 446–56
bank runs 6–7, 25–6, 29, 31–2, 44–5, 50–1, 92–3, 319, 334–7
definition 26
banking books 125–7, 141, 542–5
conclusions and future prospects 542–5
bankruptcies 3, 6–7, 9, 25–6, 29, 34–45, 146–7, 152–8, 169–70, 219–22, 223–4, 226–7, 230–1, 386–9, 414, 438–46, 528–37
banks
see also central …
activities 1–108, 431–2, 452–6, 539–45
conclusions and future prospects 542–5
confidence restoration needs 73–4, 85
derivatives-trading conclusions 423
going concern principle 41–2, 48–50, 91–5, 385–6, 483–4, 525
profit aims 385–6, 426–31, 452–6
responses to the global financial crisis from 2007 9–15, 29–30, 35–45, 48–50, 63–74, 75, 431–2
roles 75–6, 82–4, 385–6, 387, 389–90, 423, 539–45
stockholders 385–6, 387, 389–90, 428–31, 457–8
too-big-to-fail banks 7, 33–45
Barclays 34
see also options
Basel Committee on Banking Supervision (BCBS) 22, 40, 42, 48–50, 54, 57–62, 67–74, 86–9, 194–8, 421, 468–9
see also liquidity coverage ratio; monitoring tools; net stable funding ratio
basic affine jump diffusion model (bAJD) 211–12, 341
see also jump diffusion models
basis definition 14
BCBS see Basel Committee on Banking Supervision
behavioural cash flows, taxonomy of cash flows 111–13, 121–3, 136
behavioural models 86–9, 111–13, 121–3, 136, 277–382, 428–31, 457–71, 543–5
see also credit lines; non-maturing liabilities; prepayments; sight deposits
definition 277
best practices, costs of funding 432, 468–71, 545
bid–ask spreads 4, 57, 126–7, 483
BIPRU 50
BIS 56
bisection numerical procedure 230–1, 237–9
bivariate normal distributions 304–5
Black '76 approximations 216–17
Black and Cox structural (endogenous) credit risk model 219–20
Black–Scholes option pricing model 220, 292–3, 297–9, 486–91, 496–9, 501
BNP Paribas 3
bonds 10–11, 23–6, 41, 45, 52–64, 67–74, 84, 90–5, 103, 111–13, 116, 119–23, 124–34, 145–69, 186–91, 195–276, 292–6, 317–37, 401, 405–19, 425–71, 491–9, 518–37, 539–45
ex post reform measures 41
expected and minimum LGC of available bonds 224–56
going long in a bank's own bonds 409–19, 525
portfolios 224, 228–76, 317–19
prices 201–13, 215–19, 224–76, 292–6
Bradford & Bingley 7
bridge banks, resolution tools 42
British Banker's Association (BBA) 80–1
broad markets, definition 23
brokerage businesses, CEBS liquidity identity card 107
Brownian motion 199–201, 207–8, 211–12, 215–19, 220, 273, 341, 382
see also jump diffusion models; Wiener processes
BSL see balance sheet liquidity
bubbles 5
Bundesbank 20
burnout variables, prepayments 277–88
buy/sellback transactions 127–34, 409–14, 417–23, 491–2
call options 200–1, 205–7, 210–11, 220, 286–8, 297–9, 304–5, 366–70, 372, 379–81, 428–31, 477–91, 503–5
see also options
Canada 15
capital adequacy requirements 11–12, 17, 27–8, 39–40, 50, 55–74, 77–9, 83–4
capital ratios 39–40, 47–8, 83–4
capital's roles in LCR and NSFR 73–4
caps 138–41, 206–7, 211, 215–19, 292–6, 306, 309–16, 494, 512–13
Carlyle Capital 10
cash, LCR requirements 56–66, 147–51, 153–63, 182–5, 195–8
cash flow analysis 21–2, 48–50, 51–3, 86–9, 90–5, 99–108, 111–41, 147–68, 195–8, 199–276, 277–382, 386–423, 450–71, 473–537, 541–5
see also maturity ladders; term structure …
taxonomy of cash flows 111–15, 118–41
cash flow constraints, definition 21–2
cash flows at risk (cfaR)
see also negative …; positive …; term structure of cash flows
see also funding liquidity
Cassandra's warnings 5
causes of liquidity, definition 118
CBC see counterbalancing capacity
CBs see central banks
CCSs see cross-currency swaps
CDOs see collateralized debt obligations
CDS Itraxx Financial spread 116–17
CDSs see credit default swaps
CEBS see Confederation of European Banking Supervisors
central bank liquidity 17, 18–19, 24–32, 39–45, 64–6
see also base money; monetary policy; net autonomous factors; reserve …
central bank liquidity risk, definition 19
central banks 3–15, 17, 18–32, 33–45, 48–50, 56–74, 75, 92–5, 96–7, 99–108, 197–8, 431–2
see also individual central banks; open market operations; standing facilities; targeted liquidity assistance
CEBS liquidity identity card 99–108
monetary policy operations 18, 29–32
regulatory/supervisory roles 28–32, 33, 37–45
rescues 4–7, 9–15, 29–30, 33–4, 35–45, 68, 73–4
responses to the global financial crisis from 2007 9–15, 29–30, 35–45, 48–50, 63–74, 75, 431–2
central clearing (CC) 99, 542–5
certificates of deposit (CDs) 76–9, 90–5, 433–46, 453–6, 459–671
CFPs see contingency funding plans
Chapter 11 bankruptcy filings 6, 34–5
characteristic function 342, 382
chi-squared distributions 205–7, 441–6, 527
CIR see Cox, Ingersoll and Ross interest-rate model
CIR++ model 209–12, 225–47, 250–6, 262–74, 320–37
see also Cox, Ingersoll and Ross …
concepts 209–12, 225–47, 250–6, 320, 325–6
expected and minimum LGC of available bonds 225–47
clearing houses 39, 186–91, 473–5, 542–5
clearing membership (CM) 99, 107
clearing and settlement business, CEBS liquidity identity card 99
CLOs see collateralized loan obligations
CME 80
collateral 4–15, 18, 21–32, 34–5, 39, 48–50, 56–74, 79–82, 98–108, 126–7, 186–91, 194–8, 227–8, 239–56, 406, 473–537, 539–45
conclusions and future prospects 539–45
collateral accounts 473–511, 539–45
collateral agreements
derivatives 186–91, 473–537, 540–5
collateral desks, conclusions and future prospects 539–41
collateral margining, LBs 186–91
collateralized debt obligations (CDOs) 4–5, 6, 8, 35, 82
collateralized loan obligations (CLOs) 6, 8, 82
collateralized loans 4–5, 6, 8, 35, 82, 227, 239–56
commercial banks, investment banks 6–7, 82–4
commercial mortgages, CEBS liquidity identity card 105
commercial paper (CP) 3, 6, 9, 13, 23, 26, 37, 39, 49–50, 57–62, 76–9, 82–4, 90–5, 99, 103–6, 197–8
Commercial Paper Funding Facility 37
committed credit lines, OBSs 192–4
commodities 199, 405, 421–3, 486–91
compound interest 206, 223, 360–2, 532–7
concentration of funding, definition 67–8
conclusions and future prospects 39–45, 539–45
conditional selling probabilities, illiquid bond values 266–70
conduits 9, 28, 82–4, 106, 197
Confederation of European Banking Supervisors (CEBS) 55, 63, 64–5, 88, 94–108
liquidity identity card 94, 95–108
qualitative information set 96–7
quantitative information set 94, 96–7
confidence levels
unexpected funding cost measures 526–8, 533–7
VaR 300–3, 309–16, 432, 438–46, 526–8, 533–7
confidence restoration needs, banks 73–4, 85
Constâncio, Vítor 44
constant prepayment rates (CPRs) 278–88
see also empirical prepayment models
contagion problems 13, 28, 29, 35–45, 72–3
contingency funding plans (CFPs) 89–95, 96–7
contingent funding capacity 49–53, 62, 69, 86–95, 196–8
contingent liability claims 47–50, 62, 72–3, 86–9, 94–5, 96–108, 196–8, 278, 406–19, 457–68, 475–537
contingent outflows 49–50, 86–9, 196–8
continuous time replicating portfolios, derivatives pricing 480–3
convertible debt proposals 42–3
copulas 339
corporate bonds 6, 52–3, 57–62, 67–74, 84, 90–5, 111–13, 116, 124–7, 195–8
correlated firms, multiple defaults 222, 225
correlation matrices, prepayments 310–16
costs 29–32, 35, 53, 77–9, 88–9, 116–18, 143, 144, 149–98, 257–70, 305–37, 360–2, 367–70, 385–423, 425–71, 473–537, 541–5
definitions 116, 387–8, 402–3, 419, 421–3, 429–31
mortgage pricing including prepayment costs 308–16
costs of funding 29–32, 35, 53, 77–9, 88–9, 116–18, 143, 144, 149–98, 257–70, 360–2, 367–70, 385–423, 425–71, 473–537, 541–5
see also debit value adjustments; funding cost risk; funding curves
best practices and regulations 432, 468–71, 545
credit risk links 385–423, 425–31, 483
definition 116, 387–8, 402–3, 419, 423, 429–31
funding costs included in loan pricing 446–56
costs of liquidity 29–32, 35, 53, 77–9, 88–9, 116–18, 143, 144, 149–98, 257–70, 360–2, 367–70, 385–423, 425–71, 473–537, 541–5
counterbalancing capacity (CBC) 143–4
see also liquidity buffers; liquidity generation capacity
counterparty credit risk 7, 13, 19, 25, 35–9, 47, 85–9, 90–5, 105, 121–3, 152–8, 168, 186–91, 195, 223–4, 239–56, 335–7, 364–70, 373–8, 385–423, 474–80, 483–91, 502–5, 519, 528–37, 542–3
see also credit default swaps
counterparty losses 7, 90–5, 385–423
country risk 250
Countryside Financial Corp. 3
coupons 127–34, 225–47, 278–316, 371–2
covariance matrices 215–19, 229–31, 263–76
covariances 25, 215–19, 229–31, 263–76, 304–5
Cox, Ingersoll and Ross interest-rate model (CIR) 138–9, 202–13, 221–2, 223–4, 225–47, 258–74, 288–90, 297–9, 320–37, 341–7, 366–70, 379–82, 433–46, 453–6, 527–8
CIR++ model 209–11, 225–47, 250–6, 262–74, 320–37
concepts 202–13, 221–2, 223–4, 225–47, 258–74, 288–90, 297–9, 341–7, 379, 382, 433–4
critique 209
default intensities 221–2, 225, 233–47, 262–70, 288–90, 297–9, 366–70, 521–37
expected and minimum LGC of available bonds 225–47
Kálmán filter estimations 208–9, 231–9, 253–6, 326
Monte Carlo simulations 212, 214, 379–81
multiple defaults of correlated firms 222
multiplication by a constant 208
numerical methods 212–14, 230–1, 237–9
probability distributions 205–7, 342–70
reduced-form (exogenous) credit risk models 221–2, 225–47, 289–96, 438–46
the sum of two CIR processes 207–8
zero-coupon bonds 203–4, 235–9
CPRs see constant prepayment rates
credit default swaps (CDSs) 35, 37–9, 94–5, 100, 106, 116–17, 335–7, 408–9, 420–1, 438–46, 544–5
see also counterparty credit risk
credit derivatives 35, 37–9, 94–5, 100, 106, 116–17, 335–7, 408–9, 420–1, 438–46, 544–5
credit events 112–13, 145–6, 239–56, 340–70, 407–19
credit lines 25–6, 28, 37, 65–6, 71–2, 92–5, 98–9, 104, 111–13, 115, 121–7, 141, 192–4, 277, 337–70, 386–423, 545
see also bank loans; behavioural models
adding default events 354–60, 364–70
joint distributions of usage of more than one line 347–70
liquidity management 337–9, 341–60, 365–70, 545
marginal distributions of usage 350–8, 365–70
PD 337–9, 341–2, 354–60, 364–70
portfolio of credit line liquidity management results 342, 347–60, 368–70
single credit line liquidity management results 342–60, 363–70
term structure of usage 352–70
withdrawal intensity 337–9, 340–1, 342–7, 362–70, 545
credit rating agencies 4, 6, 13, 38, 47, 52, 56–74, 83–4, 85–95, 196–8, 227–8, 246–7, 406
credit ratings 4, 6, 13, 38, 47, 49, 52, 56–74, 83–4, 85–95, 196–8, 227–8, 246–7, 406
downgrades 49, 52, 56, 58, 61, 85–95, 100, 106, 196–7
credit risk 7, 13, 19, 25–8, 37–8, 49–50, 56–62, 79–89, 96–7, 102–3, 108, 112–13, 121–3, 136, 145, 149, 152–8, 168, 186–99, 219–24, 231–3, 239–70, 277, 294–6, 301–3, 335–78, 385–423, 425–31, 433–46, 456–71, 474–5, 483–99, 502–5, 519–28, 542–3
see also debit value adjustments; probability of default
concepts 219–24, 250–70, 294–6, 373–8, 385–423, 425–31, 474–5
definition 250
funding cost links 385–423, 425–31, 483
reduced-form (exogenous) models 219, 220–2, 225–47, 289–99, 301–3, 310–16, 438–46
structural (endogenous) models 219–20
credit risk transfers (CRTs) 49–50, 824
see also securitizations
credit spreads 152–8, 199, 223–4, 225–47, 249–56, 258–70, 277, 280–2, 295–6, 335–7, 364–70, 429–31, 457–71, 524–37, 543–5
see also loss given default; probability of default
concepts 223–4, 335–7, 364–70, 429–31, 543–5
credit support annex to the ISDA Master Agreement (CSA) 186, 188, 473–5, 492–3, 496, 509–11, 528, 541–2
credit value adjustments (CVAs) 385, 387–423, 427–31, 474–5, 518–19, 528–37
see also loss given default
definition 385, 387, 390, 397, 401–2, 419, 422–3, 518
derivatives 397–401, 474–5, 518–19, 528–37
credit VaR (CVaR) 426–31, 447–52
see also unexpected losses
credit-related cash flows, taxonomy of cash flows 111–13, 136
crises
see also Eurozone debt …; global financial …
early-warning indicators 75, 90–5
cross-currency swaps (CCSs) 499, 509–11, 514–17
CRTs see credit risk transfers
CSA see credit support annex to the ISDA Master Agreement
cumulative density functions 330–7
cumulative funding requirement (CFR) 49–50, 59–62, 86–95
currencies see FX …
current account deficits 20
CVaR see credit VaR
CVAs see credit value adjustments
data aggregation capabilities 41
dealing rooms 23, 33, 423, 539–41
debit value adjustments (DVAs) 385–423, 456–7, 518–19, 528, 531, 545
see also costs of funding; credit risk; expected losses
balance sheet treatments 389–401, 404–21
concepts 385, 388–423, 456–7, 518–19, 531
critique 389–401, 416–19, 421–3
definition 385, 388, 390–2, 397, 401–3, 419, 422–3, 456, 518
derivatives 397–403, 404–23, 518–19, 528, 531
dynamic replication 404–19, 545
funding benefit perspectives 394–7, 401, 410–14, 416–23
positive recovery and liquidity risk 402–4
replication considerations 399–423, 545
debt writedown resolution tools 42–3
decision modelling, prepayments 288–96, 313–16
deep markets, definition 23
default intensities 221–2, 225, 233–47, 262–70, 297–9, 300–3, 337–70, 406–23, 438–46, 521–37
see also reduced-form (exogenous) credit risk models
default probabilities see probability of default
defaults 111–13, 121–3, 126–7, 146, 152–63, 169–70, 219–24, 225, 226–56, 258–76, 294–6, 297–9, 300–3, 337–70, 385–423, 426–71, 521–37, 544–5
see also credit risk
taxonomy of cash flows 111–13, 121–3, 152–63
delinquencies 3–4, 7, 14–15, 25, 34–5
deposit insurance 6–7, 25, 26, 44–5, 73–4
deposit SF, definition 18
depositors 21–2, 24–6, 28, 49–50, 56–74, 75–81, 90–5, 111–15, 119–27, 144, 145–98, 316–37, 425–71, 539, 541
see also sight deposits
rate models 32037
see also securitizations
global financial crisis from 2007 47
derivatives 4–7, 11–15, 21, 27–8, 34, 35, 37–9, 47, 61–2, 72–4, 78–81, 85–9, 90–5, 96–108, 112–13, 186–91, 192–4, 196–8, 281–8, 319–37, 371–8, 397–401, 404–23, 428–31, 473–537, 539–45
see also credit …; forward …; futures; FX …; options; swaps
banking conclusions 423, 539–45
Black–Scholes option pricing model 220, 292–3, 297–9, 486–91, 496–9, 501
CEBS liquidity identity card 96–7, 100
collateral agreements 186–91, 473–537, 540–5
concepts 47, 72–3, 80–1, 96–7, 100, 186–91, 192–4, 196–8, 397–403, 404–23, 473–537, 539–45
continuous time replicating portfolios 480–3
costs of funding 473–537, 541–5
CSA agreements 186, 188, 473–5, 492–3, 496, 509–11, 528, 541–2
DVAs 397–403, 404–23, 518–19, 528, 531
global financial crisis from 2007 47
price/value distinctions 421–3, 473–5, 508
prices 200–1, 204, 205–7, 210–11, 214, 216–19, 220, 286–8, 292–9, 319–37, 374–8, 379–81, 397–401, 404–19, 421–3, 473–537, 539–45
pricing with funding rates different from investment rates 483–91, 502–5
pricing in simple discrete settings 475–80
pricing when more than one currency involved 499–517
regulators 186, 188, 473–5, 492–3, 496, 509–11, 528, 541–2
replication considerations 473–537, 539–45
repo rates 489–91, 504–5, 509–11, 540–1
desks of dealing rooms, conclusions and future prospects 539–41
deterministic functions, CIR++ model 209–11, 225–47, 250–6, 271–6, 320–37
deterministic taxonomy of cash flows 111–13, 118–41, 520–1
Dillon Read 4
discount factors 203–4, 208–9, 212, 215–19, 231–3, 280–8, 291–6, 311–16, 356–62, 371–2, 385–423, 433–71, 483–91, 501–17, 519–37, 539–45
discrete settings, derivatives pricing 475–80
discrete version of the CIR model 212–14
diversification 8, 23, 54–62, 64–5, 68, 94–5, 967, 102–3, 240–7, 339, 341–60
drawdown rates 59–62, 65–6, 89–95, 197–8
drift 199–201, 219, 300–3, 341, 486–91, 508–11
DVAs see debit value adjustments
dynamic hedging 473–537, 539–45
dynamic price setting 88
dynamic replication 404–19, 473–537, 539–45
early-warning indicators 75, 90–5
see also Confederation of European Banking Supervisors
ECB 3–4, 5, 11–15, 18, 20, 44–5, 64–6, 73–4, 77–9, 94–5, 225, 227–8, 243, 249
see also open market operations; standing facilities
Euro Money Market Survey of 2012 77–9
monetary policy operations 18
rescue perspectives 20, 44–5, 73–4
economic capital 426–31, 432–71, 526–8, 533–7
economic evaluations and deposit risk management 324–37
EEA see European Economic Area
effective resolution regime, definition 40–1
efficient markets 9, 24–6, 29, 31–2
eligibility considerations 64–6, 101, 125–7, 186–91, 195–8, 474–5
ELoP see expected loss on prepayment
EMLs see expected market losses
empirical prepayment models (EMs) 277–88
see also constant prepayment rates
end of bank activities, definition 385–6
ENE see expected negative exposure
Eonia 80–1, 183, 188–9, 206–7, 215–19, 231–3, 291, 311–16, 326–37, 361–2, 433–46, 495–9, 543–4
EPE see expected positive exposure
equilibrium liquidity policies 141, 147, 158, 163, 170–1, 195–7, 433–46, 453–6
equity 4–5, 23, 26, 37, 41, 42–3, 49–50, 57–62, 64, 79–82, 95, 119–23, 124–7, 129–34, 199–201, 224, 425–71, 486, 489–91, 504–5, 542
see also stock …
ex post reform measures 41
EUR 12, 14–15, 80–1, 239–47, 312–16, 326–37, 373–8
Euribor 13, 78–9, 80–1, 95, 121–3, 183, 188–91, 206–7, 215–19, 311–16, 438–46, 495–9, 543–4
definition 80
Euro Money Market Survey of 2012 77–9
European Banking Federation (EBF) 80–1
European Commission 67
European Council 67
European Economic Area (EEA) 51, 52–3
European iTraxx Crossover index 3, 95
European options 112–13, 114–15, 205–7, 210–11, 218, 379–81, 485–91, 503–5
European Parliament 67
European payer swaptions 218
European Union (EU), reforms 42–3, 53–74
Eurozone debt crisis 13, 20, 26, 44–5, 56–7, 59–60, 63–4, 73–4, 89–90, 249–50
Eurozone reform proposals 20, 44–5, 53–74
exotic options 486
see also options; reverse knockouts
expectation value of a bond with selling probability and spread 261, 270–6
expected cash flows 306–8, 473–537
expected loss on prepayment (ELoP) 292–316, 373–81
analytical approximations 296–9, 301–3, 373–81
valuations 295–6, 299–303, 309–16
expected losses (ELs) 152–63, 223–4, 225–47, 251–6, 263–76, 291–9, 301–16, 373–8, 388–423, 426–71
see also debit value adjustments; exposure at default
expected market losses (EMLs) 427–31
expected and minimum LGC of available bonds 224–56
expected negative exposure (ENE) 186–91, 496–9, 529–37
expected positive exposure (EPE) 373–8
expected value of a bank's position in a coupon bond 226–7, 261–2
exposure at default (EAD) 251–6
see also expected losses
extreme events 39–40, 48–50, 89–95, 136
F statistics/significance 327–37
fair credit spreads 152–8, 223–4
fair dealing prices, definition 423
fair haircuts for repos and collateralized loans 247–56
fair rate on investment, definition 429–31
fair values 6–7, 9, 96–108, 117, 256–70, 284–8, 290–6, 301–3, 308–16, 320–37, 371–2, 386–423, 425–71, 473–537
FASB see Financial Accounting Standards Board
fast Fourier transforms (FFTs) 342–7
FC see costs of funding
FCAVL see forward cumulated available liquidity
the Fed 3–4, 6–7, 10–11, 15, 33–7, 39
Fed Fund Effective Rate 81
Federal Deposit Insurance Corporation (FDIC) 44
Feynman–Kac theorem 408, 482–3
FFTs see fast Fourier transforms
fiduciary funds 108
Financial Accounting Standards Board (FASB) 419–21
financial institution customers, intraday liquidity 69–71, 539
Financial Services Authority (FSA) 41, 51–3, 64, 470–1
Financial Stability Board (FSB) 12, 13, 14, 40–2, 44–5
Financial Stability Review (2008) 12
Financial Stability Review (2011) 13, 14
fine-tuning operations (FTOs) 18
Finland 42
the first mover, global financial crisis from 2007 50–3
fixed cash flows, taxonomy of cash flows 111–13, 138–41
fixed rate bullet loan prices, funding costs included in loan pricing 450–2
fixed-for-floating IRSs 217–18, 294–6
fixed-rate payer swaps 286–8, 372
floorlets 206–7, 493–4, 512–13
floors 206–7, 211, 215–19, 292–6, 306, 309–16, 493–4, 512–13
Fortis 7
forward cumulated available liquidity (FCAVL) 176–9
forward rate agreements (FRAs) 186–91, 215–19, 311–16, 427–31, 436–46, 491–4, 495, 511–14, 541
definition 215–17, 492–4, 511–12
replication 491–4, 511–13, 541
forward rate curves 281, 295, 313, 325, 373–8, 432–71, 492–4
forward rates 215–19, 280–8, 291–6, 309–16, 325–37, 373–8, 432–71, 492–4, 523–37
see also Libor market model
forward risk-adjusted measure 204–13, 263–76, 300–3, 441–6
forward starting swaps 286–8, 372
forward swap rates 292–6, 373–8
forwards 100, 186–91, 204, 262–76, 397–401, 416–19, 486–91, 505–11, 516–17
prices 204, 397–401, 486–91, 505–11
Fourier transforms 230–1, 342–7
France 7, 11, 13, 14, 71, 77, 235–9, 248–50
FRAs see forward rate agreements
FSA see Financial Services Authority
FSB see Financial Stability Board
FTOs see fine-tuning operations
FTP see fund transfer pricing
Fubini's lemma 296
full-risk pricing
see also fund transfer pricing
fund transfer pricing (FTP) 53, 86–9, 425–71, 545
see also funding curves; pricing
best practices and regulations 432, 468–71, 545
charging processes 457–68, 545
costs of liquidity 425–71, 545
definition 86–8, 425–31, 457–8
funding policies 452, 465–71, 545
funding benefit perspectives of DVAs 394–7, 401, 410–14, 416–23
funding cost risk
see also costs of funding
funding curves 425, 431, 432–71, 545
multiple funding curves 458–61, 463–71
single funding curves 458, 461–71
weighted average funding curves 432, 446, 458–71
funding gaps (FGs) 144–84, 428–31, 433
funding liquidity 15, 17–32, 54–74, 85–9, 116–18, 141, 146–69, 171–9, 195–8, 316–37, 360–2, 367–70, 385–423, 425–71
see also cash management; term structure …
concepts 15, 17–18, 19–32, 55, 85–6, 116–18, 360–1
funding liquidity risk 19–23, 24–5, 28, 85–9, 116–18, 425–71
see also haircuts; margin …; redemption …; short-term borrowing rollover …
definition 19–23, 24–5, 85, 116–17, 469
leveraged traders 23
funding mix 431–2, 454–6, 463–71
funding rates, derivatives pricing 483–91, 502–5, 540–1
funding sources of inflows/outflows for SIFIs 21–2, 24–6, 49–50, 56–74, 75–81, 90–5, 111–15, 118–34, 144–98, 316–37, 425–71, 477–537, 539
funding spreads 149–94, 257–70, 360–2, 386–423, 428–32, 436–46, 453–6, 463–71, 483–99, 502–14, 521–37, 540–5
see also funding value adjustments
funding value adjustments (FVAs) 484–524, 540–5
see also funding spreads
definition 484–9, 491, 493–4, 498–9, 503–7, 510–11, 514, 540–1, 542–4
non-collateralized interest rate swaps 518–37, 540–5
future liquidity from many bonds, expected and minimum LGC of available bonds 240–7
future liquidity from single bonds, expected and minimum LGC of available bonds 239–42
future probability distribution of deposit volumes 172
future prospects in the liquidity risk area 39–45, 539–45
FVAs see funding value adjustments
FX derivatives 11–12, 14–15, 21, 90–5, 200, 505–17
FX forward (outright) contracts 505–8, 516
FX markets 11–12, 14–15, 21, 51–3, 56–7, 90–5, 98, 199, 200, 474–5, 486, 499–517
CEBS liquidity identity card 98
FX rates, derivatives pricing 499–517
FX swaps 11–12, 14–15, 21, 90–5, 200, 509–11, 517
G-SIFI regulations 39–45, 73–4
G10 group of central bank governors 5
Gauss–Legendre quadrature scheme 489
Gaussian noise 209
Geithner, Timothy 34
geometric Brownian motion (GBM) 199–201, 220
Germany 3, 6, 7, 45, 238–9, 246–50
Gil-Pelaez formula 230
global financial crisis from 2007 3–15, 17, 29–30, 33–45, 47, 48–50, 83, 116–17, 126, 218–19, 316, 431–2, 471
historical background 3–7, 34–8, 47, 48–50
responses 9–15, 29–30, 35–45, 47–74, 75, 431–2
globalization factors, global financial crisis from 2007 47
GMRA 128
going long in a bank's own bonds 409–19
going concern principle 41–2, 48–50, 91–5, 385–6, 483–4, 525
government bonds see sovereign bonds
granularity 50
Greece 13, 20, 26, 64, 75, 249–50
the growing avalanche 7
guarantees 25, 29, 34, 42, 44–5, 62, 90–5, 99–108, 144, 177–9, 192–4
haircuts 20, 23, 27–8, 49–50, 56–62, 89–95, 96–108, 126–7, 128–34, 141, 187–91, 224–56, 407, 474–537
definition 23
fair haircuts for repos and collateralized loans 247–56
hedge funds 4, 10, 23, 26, 35, 41, 55, 107
hedging 4, 10, 23, 26, 35, 41, 55, 107, 115, 186–91, 278–316, 318–37, 371–8, 405–19, 427–31, 438–46, 473–537, 539–45
non-collateralized interest rate swaps 519–28
prepayment models 278–316, 371–8
prepayment risk hedging strategies 285–316, 371–8
high liquidity assets (HLA)
see also liquidity buffers
high-quality liquid assets (HQLAs) 58–62, 65–6, 72–4, 93–5, 195–8
HLA see high liquidity assets
houses, subprime mortgage markets 3–9, 33–5, 90–5, 116–17, 126
HQLAs see high-quality liquid assets
hyperinflation 19
Hypo RE 7
IASC see International Accounting Standards Committee
Iceland 7
ICs see intermediation costs
idiosyncratic risk 24–6, 47, 51–3, 54–62, 89–95, 102–3, 105–7, 145–6, 222, 225, 234, 250–6, 271–6, 336–7, 340–1, 348–58, 454–71
ILAA see Individual Liquidity Adequacy Assessment
ILAS see Individual Liquidity Adequacy Standard
ILG see individual liquidity guidance
illiquid assets 48–50, 82–4, 94–5, 96–108, 171–85, 256–70
illiquid bond values
see also liquidity adjustments
illiquidity 6–7, 8, 9, 18–26, 27–32, 47–50, 81, 82–4
imperfect collateralization 474–5
implied volatilities 187–91, 200–1, 292, 313–16
incomplete markets 24–31, 33–45, 75–6
incremental pricing, credit lines 368–70
indexed/contingent cash flows, taxonomy of cash flows 111–13
Indie Mac 6
Individual Liquidity Adequacy Assessment (ILAA), FSA 51–3
Individual Liquidity Adequacy Standard (ILAS) 51–2
individual liquidity guidance (ILG) 51–3
industrial approaches, production costs 421–3, 545
insolvencies 13, 25–6, 29–31, 33–45, 116
insurance 6–9, 25, 26, 30, 44–5, 73–4
interbank funding 6–15, 18–32, 40–5, 47, 73, 76–81, 905, 105–6, 124–7, 224, 285, 386–423, 433–46, 453–6, 459–71, 524–37, 544–5
interbank wholesale business, CEBS liquidity identity card 105–6
interconnectedness aspects of SIFIs 40–1
interest payments 21–2, 112–13, 120–3, 130–4, 148–9, 168, 182–5, 290–6, 361–70, 392–7, 410–19, 425–71, 475–80, 489–91, 504–5, 523–37
interest rate derivatives 292–6, 374–8, 491–9, 511–14
see also forward rate agreements; interest rate swaps
prices 292–6, 374–8, 491–9, 511–14
interest rate risk 85–9, 199, 201–19, 250, 310–17, 318–37, 542–3
interest rate swaps (IRSs) 186–91, 215–19, 231–3, 281–8, 292–6, 311–16, 371–8, 416–19, 427–31, 436–46, 491–2, 494–9, 511, 513–17, 518–37, 543
see also cross-currency …; swaps
concepts 217–19, 231–3, 292–6, 494–9, 513–17, 518–37
confidence levels to measure unexpected funding costs 526–8, 533–7
counterparty credit risk 519, 528–37
non-collateralized interest rate swaps 518–37
prices 292–6, 374–8, 491–2, 494–9, 513–15, 518–37
spread options to measure unexpected funding costs 525–37
unexpected funding costs 525–37
interest rates 7, 9–10, 18, 33, 85–9, 112–13, 115, 121–3, 126–7, 130–41, 145, 147–68, 186–91, 199–219, 221–2, 223–4, 225–47, 257–74, 277–337, 341–7, 360–70, 373–8, 379–82, 425–71, 474–537, 543–5
see also funding curves
sensitivity of the interest margin 543–4
term structure 202–13, 231–3, 282–8, 291–6, 433–71
interest rate models 138–9, 199, 201–19, 221–2, 223–4, 225–47, 257–74, 280–90, 297–9, 319–37, 341–7, 366–70, 373–8, 379–82, 433–46, 453–6, 527–8
see also Cox, Ingersoll and Ross …
expected and minimum LGC of available bonds 225–47
Monte Carlo simulations 212, 214, 320, 324–34, 373–8
one-factor models for zero rate 201
Vasicek model 201, 202, 209, 319
intermediation costs (ICs) 403–23, 431–2
internal controls 41, 42–5, 75, 88–9, 452–6
internal model simulation engines 373–8
International Accounting Standards Committee (IASC) 419–21
see also IAS …
Intesa Sanpaolo Bank (ISP) 237–9, 253–6, 264–70
intraday liquidity, definition 69–71, 90–1
intraday liquidity risk 69–71, 85–9, 90–5
intragroup exposures, CEBS liquidity identity card 98
investment banks 6–7, 23, 33–45, 79–84
investment rates, derivatives pricing 483–91, 502–5
IRSs see interest rate swaps
Italy 13, 45, 57–8, 64, 65, 234–50, 253–6, 326–37
Ito's lemma 275, 404–5, 499–500, 505–6
see also stochastic differential equations
joint distributions of usage of more than one credit line 347–70
JPMorgan 10
JPY 80
jump diffusion models 211–12, 340–1
see also Brownian motion; Poisson process
‘jump to default’ behaviours of Lehman 35
jumps 200–1, 211–12, 219–22, 289, 303–5, 340–1, 343–60, 367–70, 382, 475–80, 521–37
see also Poisson process
Kálmán filter 208–9, 231–9, 253–6, 326
Keynes, John Maynard 5
Korea Development Bank 34
large corporates/governments (LCs), CEBS liquidity identity card 104
LAs see liquidity adjustments
LBCs see liquidity buffer costs
LBs see liquidity buffers
LCR see liquidity coverage ratio
LEAs see liquid equivalent adjustments
least squares procedure 236
Lehman Brothers 6–7, 14, 25, 29, 34–5, 36–9, 57, 63, 95
lender-of-last-resort support (LLR) 6–7, 18, 29–32, 41
LEQ (loan equivalent) credit lines monitoring tool, definition 339
letters of credit 62, 108, 192–4
leverage ratios 27–8, 34–5, 39, 83–4
leverage trends 4–7, 14–15, 23, 38, 79–82, 83–4
leveraged traders
see also dealing; hedge funds; investment banks
funding liquidity risk 23
LGC see liquidity generation capacity
LGD see loss given default
liabilities 25, 75–9, 88, 144–98, 277, 278–337, 389–423, 425–71, 539–45
see also asset …
liability guarantees 25
Libor 14, 78–9, 80–1, 95, 111–13, 114–15, 116–17, 121–3, 137–41, 183, 206–7, 215–19, 280–8, 295–6, 303–5, 309–10, 373–8, 438–46, 492–9, 513–37, 543–4
definition 80
forward rate spreads 218–19, 280–8
Libor market model (LMM) 201, 215–19, 280–8
Liffe Euribor 80
Liikanen report 42
linear behavioural functions, deposit volume models 321–4, 326–37
linear regression 236, 280, 321, 326–37
liquid assets 25–6, 48–50, 55–62, 72–4, 101, 115, 171–9, 180–91, 195–8, 224–47
CEBS liquidity identity card 101
liquid equivalent adjustments (LEAs)
liquidity 15, 17–32, 35, 47–74, 75–97, 114–41, 143–98, 257–70, 360–2, 367–70, 385–423, 425–71, 473–537, 539–45
see also central bank …; funding …; market …
banking activities 1–108, 431–2, 452–6, 539–45
causes of liquidity definition 118
concepts 15, 17–32, 47, 84–9, 114–18, 425–71, 539–45
conclusions and future prospects 539–45
costs 29–32, 35, 53, 77–9, 88–9, 116–18, 143, 144, 149–98, 257–70, 360–2, 367–70, 385–423, 425–71, 473–537, 541–5
historical background 3–15, 47
solvency contrasts 22, 30–2, 33–45, 47, 116
sources of liquidity definition 118, 432–3
liquidity adequacy rules 50
liquidity adjustments (LAs)
see also liquid equivalent…; price volatility …
liquidity buffer costs (LBCs) 157–98, 428–31
liquidity buffers (LBs) 25, 39, 50, 52–3, 55–66, 72–3, 92–3, 94–5, 96–7, 101, 122–3, 124, 130, 141, 143–98, 249–50, 318–19, 338–9, 360–70, 428–31, 432, 454–6, 468–71, 523–4, 533, 535
see also counterbalancing capacity; liquidity coverage ratio
actual severer-than-predicted scenarios 169–70
characterizing features 144
composition features 144
costs 143, 144, 149–98, 428–31
derivative collateral 186–91, 192–4, 196–8
funding assets with several liabilities 168–9
general formula for costs 163–8
maturity mismatch framework 145–68, 197–8
needs 144, 145–68, 186–91, 192–4, 432
off-balance-sheet transactions 192–4
size features 144, 158–63, 172–85
term structure of available funding 171–9
time horizons 144, 145–69, 171–85, 188–91, 195–8
liquidity coverage ratio (LCR) 54–74, 75, 94–5, 194–8
see also liquidity buffers; unencumbered assets
implementation dates 60–1, 73–4
visual representation 63
liquidity generation capacity (LGC) 123–41, 143–4, 224–47, 257
see also balance sheets; counterbalancing capacity; term structure of cumulated LGC; term structure of expected cumulative cash flows
expected and minimum LGC of available bonds 224–56
liquidity identity card, CEBS 94, 95–108
liquidity management, credit lines 337–9, 341–60, 365–70, 545
liquidity options 114–15, 121–3
liquidity preference theory 322–4
liquidity premium costs (LPCs) 402–4, 414, 419, 483
‘liquidity proposal’ of the BCBS 54–62, 67–8
liquidity ratios 39, 54–74, 75, 89–95, 107–8
liquidity risk 15, 17–32, 47, 48–74, 75–108, 114–41, 186–91, 194–8, 277, 316–37, 344–7, 402–23, 468–71, 473–537, 539–45
see also funding …; market …
conclusions and future prospects 39–45, 539–45
diversification links 68
intraday liquidity risk 69–71, 85–9, 90–5
liquidity risk management 47, 48–74, 75, 81, 88–95, 97, 109–382, 468–71, 539–45
liquidity risk measures 48–74, 75, 81, 86–9, 95–7, 118–41, 194–8, 543–5
liquidity risk metrics, definition 86–7
liquidity risk tolerance 86–95, 96–7
liquidity value adjustments (LVAs)
definition 476–7, 484–5, 487–9, 491–5, 502–5, 506–7, 510, 513, 539–41
LLR see lender-of-last-resort support
LMM see Libor market model
loans syndication 21
log-likelihood functions 209
lognormal distributions 216–19, 291–6, 300–3, 373–8, 379–81
long positions 257–70, 287–8, 371–2, 404, 409–19, 479–91, 492–9, 507–8
long-term funding 12, 18, 48–50, 64, 96–7, 105, 108, 116, 122–3, 145–68, 197–8, 425–71, 543–5
see also asset–liability management
long-term funding ratio 48–50, 96–7
long-term refinancing operations (LTROs) 12, 18, 64
longer-term rollover risk 105, 108, 116, 122–3, 145–68, 197–8, 431–71
loss given default (LGD) 152–8, 223–4, 225–47, 260–70, 386–423, 427–31
see also credit spreads; credit value adjustments
loss modelling, prepayments 290–6, 545
LTROs see long-term refinancing operations
LTV see Loan To Value
LVAs see liquidity value adjustments
macroeconomic liquidity 19, 39–40, 44, 71–3, 97
macroprudential perspectives 39–40, 44, 97, 543
main refinancing operations (MROs) 11–12, 15, 18, 95
maintenance margin 473–537, 542–3
margin 4, 10, 23, 25, 26, 27–8, 34–5, 47, 62, 85–95, 99–108, 1267–, 186–91, 231–3, 318–37, 416–23, 429–31, 458–68, 473–537, 542–5
marginal costs
see also matched maturities
marginal distributions of usage of credit lines 350–8, 365–70
marginal lending SF, definition 18
mark-to-market valuations (MTM) 7, 9, 27–8, 100, 197–8, 374–8, 389–97, 401, 407–19, 421–3, 456–7, 460–71, 543
market interest rates, deposit models 319–37
market liquidity 6, 15, 17–32, 85–9, 101, 116, 117, 468–71
see also pricing of complex instruments
market liquidity risk, definition 23, 26, 85–6, 116, 117, 469
see also expected market loss; market VaR
market risk 56–62, 85–9, 136, 197, 199–276, 291–6, 318–37, 425–71, 542–5
see also credit spreads; FX …; interest rate …
concepts 197, 199–276, 291–6, 425–31, 468–71, 542–5
expected and minimum LGC of available bonds 224–47
fair haircuts for repos and collateralized loans 247–56
models 138–9, 164–8, 197–8, 199–276, 291–6, 543–5
market-wide stressed scenarios 51–62, 69, 89–95, 96–7, 105–7
see also systemic risk
Marxist economic theory 421
matched maturities
see also marginal costs; maturity mismatch framework
maturity ladders 48–50, 96–7, 119–41
see also cash flow analysis; term structure of expected cash flows
maturity mismatch framework 25, 38–9, 47, 48–50, 52–3, 63–8, 94–5, 99, 105, 107, 122–3, 145–68, 174–5, 197–8, 316–17, 468–71
see also liquidity coverage ratio
maximum likelihood estimation (MLE) 208–9, 231–9, 253–6, 326
maximum losses (MLs) 252–6, 257–70
mean reversion 202–13, 273–6, 341, 434–46, 453–6, 526–8
means 187–91, 202–13, 229–31, 263–76, 341, 434–46, 453–6, 526–8
medium-term notes (MTNs) 1
mergers and acquisitions (M&As) 36
Merton's structural (endogenous) credit risk model 219–20
microprudential perspectives 39–40, 44, 97, 543
see also Basel III
minimum transfer amounts (MTAs) 473–4
missing cash flows, taxonomy of cash flows 112–13, 127
MLs see market losses
MMF see Money Market Fund
models for the behavioural approach 86–9, 111–13, 121–3, 136, 277–382, 428–31, 457–71, 543–5
see also behavioural models
models for market risk factors 138–9, 164–8, 197–8, 199–276, 543–5
see also market risk
monetary corridor, definition 18
monetary policy 17, 18–19, 29–32, 41, 84, 90–5
see also central bank liquidity
‘monetization’ factors 48–50, 64, 69, 76–9, 83–4, 92–5
money markets 7, 9, 11–14, 18–19, 37, 76–82, 89–95, 97–108, 318–37, 433–46, 540–5
see also commercial paper; medium-term notes
money multiplier, definition 17
see also at-the …; in-the …; out-of-the …
monitoring tools 19, 31–2, 38–45, 53–74, 75, 82, 86–7, 93–7, 111–41, 194–8, 224–47, 337–41, 452–6, 473–5, 543–5
see also term structure …
Monte Carlo simulations 212, 214, 296, 320, 324–34, 373–8, 379–81
moral hazard 7–9, 19, 25–6, 28–30, 31–2, 33–45
Morgan Stanley 67
mortgage credit risk, prepayments 294–6, 545
mortgage maturities, prepayments 311–16, 545
mortgage pricing including prepayment costs 308–16
mortgage rate approximation accuracy 373–81
mortgage-backed securities (MBSs) 4–5, 8, 11, 57–62
see also asset-backed …; securitizations
movie revenues 8
MROs see main refinancing operations
MTAs see minimum transfer amounts
MTNs see medium-term notes
multilateral netting and margining of derivatives contracts 186–91
multiple defaults, correlated firms 222, 225
multiple funding curves, critique 458–61, 463–71
MVaR see market VaR
national central banks (NCBs) 20, 41
see also central banks
NCBs see national central banks
NCO see net cash outflow
Nederlandsche Bank 20
negative cash-flow-at-risk 136–41, 385–423, 520–1, 524–37
negative externalities, failing firms 38–9, 73
net autonomous factors, definition 18–19
net cash outflow (NCO), LCR definition 195–8
net funding requirement (NFR), definition 49–50
net present values (NPVs)
derivatives 186–91, 419–21, 473–537
net stable funding ratio (NSFR) 55–62, 66–8, 73–4, 94–5, 96–7, 195
see also available …; required …
implementation date 74
netting 39, 96–7, 186–91, 474–5
network externality, definition 38–9
new business model of credit, risk transfer techniques 28, 49–50, 82–4
new-business cash flows, taxonomy of cash flows 111–13, 122–3
Newton–Raphson numerical procedure 237–9
NINJA mortgages see ‘no income no job (or) assets’ mortgages
NMLs see non-maturing liabilities
‘no income no job (or) assets’ mortgages (NINJA mortgages) 8
non-collateralized interest rate swaps 518–37, 540–5
see also interest rate swaps
non-maturing liabilities (NMLs) 179–85, 188–91, 196–8, 277, 316–37
see also sight deposits
nonlinear behavioural models, deposit volume models 321–4, 330–7
normal distributions 201, 220, 229–31, 304–5, 339, 346–7, 486–91
note issuance facilities 192–4, 468–71
Noyer, Christian 64
NPVs see net present values
NSFR see net stable funding ratio
numerical methods 212–14, 230–1, 237–9, 260–70, 296–9
see also Monte Carlo simulations
OAS models see stochastic factor models
objective aspects of prices 422
off-balance-sheet transactions (OBSs) 9, 21–2, 28–9, 47, 48–50, 67–8, 88–9, 96–108, 192–4
OIS rates 15, 81, 188, 206–7, 216–19, 291, 293–6, 301–3, 361–2, 433–46, 474–5, 493–4, 511, 519–37, 544
OMOs see open market operations
one-factor interest rate models 201–19
one-size-fits-all approach, ratios 71–3
‘open issues’, treasury functions 539–45
open market operations (OMOs) 18–19, 21–2, 29, 64
see also fine-tuning …; long-term refinancing …; main refinancing …
operational risk 859
optimal portfolio allocations 23
options 100, 111–15, 121–3, 187–91, 200–1, 205–7, 210–14, 217–19, 286–8, 292–9, 309–17, 318–37, 365–70, 372, 401, 404–19, 428–31, 477–91, 525–8, 533–7, 541, 545
see also American …; barrier …; call …; European …; liquidity options; put …; reverse …
Black–Scholes option pricing model 220, 292–3, 297–9, 486–91, 496–9, 501
prices 200–1, 205–7, 210–11, 214, 216–19, 220, 286–8, 292–9, 319–37, 379–81, 404–19, 477–91, 496–9, 503–5, 525–8, 533–7
swaptions 217–19, 286–8, 292–6, 309–16, 496–9, 514
originate-to-distribute business model (OTD) 82–4
see also securitizations
OTD see originate-to-distribute business model
out-of-the-money options 478–91
Outright Monetary Transaction (OMT) 20
over the counter transactions (OTC) 22, 39, 81, 100, 397–401, 473–537
overhedge strategies, prepayments 310–16
Papoulias, Karolos 26
Pareto-efficient allocations 1
partial differential equations (PDEs) 407–19, 482–3, 506–11
see also Black–Scholes option pricing model
path-dependent options 214
payer swaps 286–8, 372, 496–9, 514, 520–37
payment and settlement systems 19–22, 69–71, 90–5, 98–100
PD see probability of default
PDCF see Primary Dealer Credit Facility
PDEs see partial differential equations
PDFs see probability density functions
peer-monitoring supervision 31
PFE see potential future exposure
the phantom menace 4
Plato 75
PNS see probability that the bond is not sold
Poisson process 211–12, 221–2, 340–1, 343–7, 367–70, 382, 521, 529
see also jump …
portfolio of credit line liquidity management results 342, 347–60, 368–70
portfolios of mortgages, prepayments 311–16, 545
positive cash-flow-at-risk 136–41, 385–423, 520–1
potential future exposure (PFE) 186–91, 496–9
PRDV01 see prepayment-risky annuity
precautionary hoarding 24, 26, 28–9, 37, 38
prepayment risk hedging strategies 285–316, 371–8
prepayment-risky annuity (PRDV01) 308–16
prepayments 111–13, 115, 121–3, 141, 277–316, 371–81, 428–31, 545
see also behavioural models
concepts 277–316, 371–81, 428, 545
conclusions on models 288
decision modelling 288–96, 313–16
double rational prepayment extension 303–5, 310–16
empirical prepayment models 277–88
mortgage maturities 311–16, 545
mortgage pricing including prepayment costs 308–16
mortgage rate approximation accuracy 373–81
portfolios of mortgages 311–16, 545
present value of the sum of expected cash flows (PVECFs) 308–16, 473–537
present values (PVs) 186–91, 200–1, 260–70, 308–16, 363–70, 386–423, 449–71, 473–537
price volatility adjustments (PVAs)
prices
Black–Scholes option pricing model 220, 292–3, 297–9, 486–91, 496–9, 501
bonds 201–13, 215–19, 224–76, 292–6
credit lines 337–9, 360–70, 387–9
derivatives 200–1, 204, 205–7, 210–11, 214, 216–19, 220, 286–8, 292–9, 319–37, 374–8, 379–81, 397–401, 404–19, 421–3, 473–537, 539–45
forwards 204, 397–401, 486–91, 505–11
funding costs included in loan pricing 446–56
futures 204
interest rate derivatives 292–6, 374–8, 491–9, 511–14
IRSs 292–6, 374–8, 491–2, 494–9, 513–15, 518–37
Monte Carlo simulations 214
mortgage pricing including prepayment costs 308–16
objective aspects 422
options 200–1, 205–7, 210–11, 214, 216–19, 220, 286–8, 292–9, 319–37, 379–81, 404–19, 477–91, 496–9, 503–5, 525–8, 533–7
pricing of derivatives with funding rates different from investment rates 483–91, 502–5
pricing of derivatives when more than one currency involved 499–517
repo rates 489–91, 504–5, 509–11, 540–1
swaps 292–6, 374–8, 491–2, 494–9, 509–17, 518–37
value contrasts 421–3, 473–5, 508
pricing of complex instruments 4–6, 17, 47, 523, 75, 824, 879, 95, 117, 200–1
see also market liquidity
Primary Dealer Credit Facility (PDCF) 11, 33, 34–5
Prince, Chuck 5
private depositors, interbank market differences 21–2
private equity funds, limits 41
probabilities 6, 38, 65–6, 89–95, 126–7, 146, 152–63, 169–70, 187–91, 193–4, 197–8, 205–7, 219–24, 226–56, 257–76, 286–8, 294–6, 299–305, 308, 322–3, 330–9, 341–70, 371–8, 401, 419, 426–71, 477–91, 527–37, 544–5
probability of default (PD) 126–7, 146, 152–63, 169–70, 219–24, 226–56, 258–76, 294–6, 337–9, 341–2, 354–60, 364–70, 401, 419, 426–71, 527–37, 544–5
see also credit risk; credit spreads
concepts 219–24, 226–7, 240–56, 294–5, 337–9, 354–60, 401, 419, 544–5
credit lines 337–9, 341–2, 354–60, 364–70
probability density functions (PDFs) 323–37
probability distributions 201, 205–7, 211–12, 216–19, 220, 221–2, 229–31, 291–6, 300–3, 304–5, 339, 340–1, 342–70, 441–6
probability of selling (PS)
conditional selling probabilities 266–70
definition 259
probability that the bond is not sold (PNS) 259–70
production costs, definition 421–3, 545
productive risk, concepts 426–31
profit aims of banks 385–6, 426–31, 452–6
proprietary trading limits 41–2
public sector entity (PSI) 55
put options 206, 211, 286–8, 298–9, 307–9, 372, 485–91, 503–5, 525–8
see also options
put–call parity 286–8, 299, 372
PVAs see price volatility adjustments
PVECFs see present value of the sum of expected cash flows
qualitative information set, CEBS 96–7
quantile calculations, expected and minimum LGC of available bonds 228–31, 239–56
quantitative information set, CEBS 94, 96–7
quantitative liquidity risk 116–17, 118–41, 543–5
see also liquidity risk
quantitative modelling needs, FTP 470
R2 values, economic evaluations and deposit risk management 327–37
RAROC see risk-adjusted return on capital
rational prepayment models (RPMs) 278, 288–90, 291–6, 299–303, 306–8, 310–16
rationality 277, 278, 288–90, 291–6
ratios 27–8, 34–5, 39–40, 47–50, 54–74, 75
see also liquidity coverage …; net stable funding …
one-size-fits-all approach 71–3
RBS see Royal Bank of Scotland
RD/FD see risk-free/funding rate drift
real-time gross settlement systems 20–2, 98–100
see also TARGET2
receiver swaps 496–9, 514, 520–37
recovery 41–5, 113, 118, 152–8, 223–4, 225–47, 294–6, 386–423, 438–71, 521
recovery of market value (RMV), definition 223–4, 439, 521
redemption risk, definition 23
reduced-form (exogenous) credit risk models 219, 220–2, 225–47, 289–99, 301–3, 310–16, 438–46, 531–7
refi rates 18
refinancing incentives (RIs) 278–316
reforms 39–45, 47–74, 75, 468–71, 539–45
refunding risk 432, 449–71, 527–8
regulators 4, 13, 17, 25, 27, 28–32, 39–45, 47–74, 75, 77–9, 92–5, 194–8, 468–71, 473–5, 492–3, 509–11, 528, 539–45
see also accounting standards; Basel …; Financial Services Authority; G-SIFI regulations; supervisors
CSA agreements 186, 188, 473–5, 492–3, 496, 509–11, 528, 541–2
derivatives 186, 188, 473–5, 492–3, 496, 509–11, 528, 541–2
reforms 39–45, 47–74, 75, 468–71, 539–45
reinvestments, LBs 150, 158, 172–3
replicating conditions, definition 481–3, 500–1
replication considerations
repo desks, conclusions and future prospects 539–41
repos 18, 23, 33, 39, 49–50, 57, 64–6, 76–82, 95, 97–108, 124–34, 200–1, 240–56, 407–9, 417–23, 489–91, 504–5, 509–11, 539–45
derivatives pricing 489–91, 504–5, 540–1
fair haircuts for repos and collateralized loans 247–56
reputational risk 56–62, 83–4, 85–9, 91–5, 96–7, 99, 102–8
required stable funding (RSF) 66–8
rescues 4–7, 9–15, 29–30, 33–4, 35–45, 68, 73–4
reserve requirements 17–19, 26, 115
residential mortgage-backed securities (RMBSs) 4–5, 8, 57–62
residential mortgages 4–5, 8, 57–62, 102–3, 162–3
resilient markets 23, 47–74, 94–5, 96–7
resolution planning for G-SIFIs 40–5, 47, 73–4
resolvability assessments for G-SIFIs 40–1
responses to the global financial crisis from 2007 9–15, 29–30, 35–45, 47–74, 75, 431–2
retail deposit runoff, definition 196
retail funding 96–7, 108, 124–7, 153–8, 174–5, 196–8
returns 4–7, 25–6, 43, 53, 76, 90–5, 120–3, 156–8, 193, 201–13, 425–71, 483–91, 502–5, 522–37
reverse knockouts 486
reverse repos 18, 49–50, 128–34, 489–91, 504–5, 541
revolving lines of credit, OBSs 192–4
RF/FU see risk-free/funding rate discounting
Riccati's equations 382
Richard and Roll EM 278
RIs see refinancing incentives
risk
see also credit …; intraday …; liquidity …; market …; operational …; reputational …; Value-at-Risk
appetites 4–7, 28, 31–2, 37, 43–5, 51–3, 75, 86–95
definition 17–19, 84–9, 115–16
limits 27
risk management 47, 48–74, 75, 81, 88–95, 97, 109–382, 468–71, 539–45
risk transfer techniques, new business model of credit 28, 49–50, 82–4
risk-adjusted return on capital (RAROC)
see also value added
risk-free rates 115–16, 126, 138, 147–68, 182–5, 188–91, 192–4, 201, 209–13, 215–19, 220–6, 231–3, 250–6, 258–70, 291–6, 320–37, 361–70, 373–8, 386–423, 425–31, 432–71, 475–517, 519–37, 539–45
risk-free/funding rate discounting (RF/FU) 487–91
risk-free/funding rate drift (RD/FD) 487–91
risk-neutrality 199–218, 276, 289, 320–37, 373–8, 476–83, 508
risk–reward profiles 6
risk-weighted capital requirements 9, 39–40, 42–5
RMBSs see residential mortgage-backed securities
RMV see recovery of market value
Royal Bank of Scotland (RBS) 6, 51
royalty payments 8
RPMs see rational prepayment models
RSF see required stable funding
runoff rates, LCR 56, 59–74, 106, 182–5, 195–8
s-adjusted measure see forward risk-adjusted measure
Sachsen LB 6
sales aspect of ‘the three S's’ 93–5
sales of businesses, resolution tools 41–2
savings 21–2, 24–6, 28, 49–50, 56–74, 75–81, 90–5, 102, 114–15, 277, 432
see also deposit …
scenario analysis 48, 51–3, 54–74, 75, 89–95, 96–7, 106, 144–98, 224, 228–47, 337, 454–71
SDEs see stochastic differential equations
second-round vicious circle effects of liquidity types 27–9
secured credit facilities 35
secured funding runoff, definition 196
secured lending and borrowing 35, 77–9, 99, 196
CEBS liquidity identity card 99
Euro Money Market Survey of 2012 77–9
securities lending and borrowing 10–11, 27–8, 99, 101, 127, 129–34, 489–91, 504–5, 540–5
Securities Market Programme (SMP) 12, 13
securitizations 8, 21–2, 28, 66–8, 76–9, 82–4, 85–6, 90, 93–5, 96–108
see also asset-backed securities; credit risk transfers
bank lending channel 84
self-financing conditions 405–19, 481–3, 500–1
self-fulfilling prophecies 26, 77–8
sell/buyback transactions 127–34, 409–14, 417–23, 491–2
selling intensity, illiquid bond values 258–70
Severino, Emanuele 409
SF see stochastic factor models …
SFs see standing facilities
short positions 286–8, 372, 404, 409–19, 479–91, 492–9
short-term borrowing rollover risk 23, 51–3, 77–9, 83–4, 105, 116, 122–3, 145–68, 197–8, 431–71
short-term funding 23, 48–50, 56–74, 83–4, 170–1, 224, 335–7, 425–71
see also commercial paper; treasury
short-term liquidity, definition 119
SIFIs see systemically important financial institutions
sight assets 65–6, 114–15, 121–3, 141, 179–85, 277, 316–37
sight deposits 179–85, 277, 316–37, 463–71
see also behavioural models; non-maturing liabilities
bond portfolio replication model 317–19
economic evaluations and deposit risk management 324–37
linear/nonlinear behavioural volume models 321–4, 326–37
stochastic factor models (OAS models) 317, 318–37
significant counterparties/instruments/currencies, definitions 67–8
single credit line liquidity management results 342–60, 363–70
SIV-lites, definition 9
SIVs see structured investment vehicles
skills' requirements 541, 543–5
SLRP see Supervisory Liquidity Review Process
SMP see Securities Market Programme
social costs of systemic failures 30, 33, 41, 44–5
solvency 22, 27, 30–2, 33–45, 47, 116
constraints 27
liquidity contrasts 22, 30–2, 33–45, 47, 116
Sonia 81
sound and prudent management principle 394
sources of liquidity, definition 118, 432–3
sovereign bonds 56–64, 73–4, 95, 154–8, 195–8, 227, 234–50
SP see survival probability
Spain 13, 45, 64, 235–9, 248–50
special information hypothesis, definition 415
Special Liquidity Scheme 11
special purpose vehicles (SPVs) 6–7, 9, 28, 82–4, 103, 106–7
specialness of single bonds 225–47, 262–70
spread options 337–9, 365–70, 525–37
SPVs see special purpose vehicles
standard deviations 199–213, 341
standards 40–5, 96–7, 419–21, 542–3
standing facilities (SFs)
see also deposit …; marginal lending …
definition 18
stochastic differential equations (SDEs) 202, 404–19
see also Ito's lemma
stochastic factor models (OAS models) (SF)
see also sight deposits
stochastic interest rate models 138, 164–8, 201–19, 297–9, 337–9, 379–81, 388–9, 393–7, 404–19, 433–46
stochastic processes 19, 89–95, 102–4, 108, 111–13, 118–41, 164–8, 179–85, 200–21, 227–47, 260–76, 288–90, 297–9, 310–16, 317, 318–70, 379–82, 388–9, 393–7, 404–19, 433–46, 481–3, 499–517, 521–37
stochastic taxonomy of cash flows 111–13, 118–41
stock prices
see also equity
see also liquidity coverage ratio
stockholders, banks 385–6, 387, 389–90, 428–31, 457–8
stressed scenarios 49–53, 54–74, 75, 86–95, 96–7, 106, 144–98, 224, 228–47, 337, 454–71
structural (endogenous) credit risk models 219–20
structural liquidity, definition 119
structured credit products 4–7, 9, 34–5, 39–40, 55, 100, 126–7, 197–8
structured investment vehicles (SIVs) 6–7, 9, 28, 61–2, 82–4, 106, 197–8
subjective aspects of values 422
subprime mortgage markets 3–9, 33–5, 90–5, 116–17, 126
definitions 7
substitutability aspects of SIFIs 40–1
the sum of two CIR processes 207–8
supervisors 4, 13, 28–32, 33, 37–45, 47–74, 75, 83–4, 86–9, 95–7, 197–8, 468–71, 473–5, 492–3, 496, 509–11, 528, 539–45
see also Basel …; regulators
reforms 39–45, 47–74, 75, 468–71, 539–45
Supervisory Liquidity Review Process (SLRP), FSA 51
survival 86–95, 144, 152–8, 164–79, 180–5, 187–91, 195–8, 223–4, 226–47, 289–90, 295–6, 300–5, 306–8, 339, 354–60, 364–70, 371–2, 439–46, 521–37
survival probability 226–47, 371–2, 439–46
SwapClear 35
swaps 11–12, 14–15, 21, 35, 37–9, 80–1, 90–5, 100, 186–91, 200, 215–19, 231–3, 281–8, 292–6, 306, 311–16, 319–37, 371–2, 373–8, 416–19, 427–31, 436–46, 494–9, 509–37, 543–5
see also basis …; credit default …; FX …; interest rate …; meta …
prepayment models 281–8, 371–8
prices 292–6, 374–8, 491–2, 494–9, 509–17, 518–37
swaptions 217–19, 286–8, 292–6, 309–16, 496–9, 514
syndication aspect of ‘the three S's’ 93–5
systemic liquidity risk 17–32, 33–45, 126–7
systemic risk 17–32, 33–45, 89–95, 126–7, 145–6
systemically important financial institutions (SIFIs) 21–2, 34, 38–45, 539–45
see also G-SIFI regulations
definition 40
tail events 39–40, 48–50, 89–95, 136
TARGET2 system 20
targeted liquidity assistance (TLA), central banks 29, 33
Tarullo, Daniel 39
TAs see total adjustments of a collateralized option
taxonomy of cash flows 111–15, 118–41
Term Auction Facility (TAF) 11
Term Securities Lending Facility 10–11
term structure of available assets (TSAA) 127–34, 135–41, 171–85, 224–47
see also available …
term structure of cash flows (TSCF) 137–41
see also cash flows at risk
term structure of credit lines 352–70
term structure of cumulated LGC (TSCLGC) 125–6, 130–41
term structure of expected cash flows (TSECF) 119–23, 127–34, 135–41
see also maturity ladders; term structure of LGC
term structure of expected cumulative cash flows (TSECCF) 119–23, 127–41, 224–47
see also liquidity generation capacity
term structure of expected liquidity (TSLe) 134–41, 239–56
see also term structure of expected cumulative cash flows; term structure of LGC
term structure of expected and minimum future volumes 328–38
term structure of expected and minimum levels of liquidity with and without credit events 239–56
term structure of forward cumulated funding (TSFCFu) 175–9, 180–5
practical building methods 177–9
term structure of forward rates 189–91, 282–8, 291–6, 521–37
term structure of funding liquidity (TSFu) 141, 146–69, 171–85, 195–8, 325–37, 425–71, 542–5
practical building methods 173–5, 325
term structure of interest rates 202–13, 231–3, 282–8, 291–6, 433–71, 520–37
see also Cox, Ingersoll and Ross …
term structure of LGC (TSLGC) 125–41, 224–47
see also liquidity generation capacity; term structure of expected cash flows
term structure of liquidity 50, 55–62, 88, 134–41, 145–68, 224–47, 265–70
term structure of liquidity-at-risk (TSLaR) 140–1
term structure of minimum liquidity 224–47
term structure of usage of credit lines 352–70
time dimension, taxonomy of cash flows 111–13, 118–41
time horizons 65–73, 86–95, 111–13, 118–41, 144, 145–69, 171–85, 188–91, 195–8, 225–47, 263–76, 324–34, 389–97, 477–91
TLA see targeted liquidity assistance
too-big-to-fail banks 7, 33–45
total adjustments of a collateralized option (TAs) 487–91
total prepayment costs (TPCs) 305–16
toxic assets 36
see also Troubled Asset Relief Programme
TPCs see total prepayment costs
trade finance, CEBS liquidity identity card 108
trading books 125–7, 141, 542–5
conclusions and future prospects 542–5
trading intensity
definition 258
transaction costs 23, 77–9, 289–90
transition probabilities 6
transparent management practices 31–2, 33, 41, 99
treasury 53, 73, 86–9, 97, 122–3, 134–41, 425–71, 539–45
see also short-term …
conclusions and future prospects 539–45
FSA letter 53
organizational issues 539–41, 543–5
skills' requirements 541, 543–5
Treasury bonds 10, 195–8, 249–56
Trichet, Jean-Claude 5
Troubled Asset Relief Programme (TARP) 11, 35–6, 38
see also toxic assets
trust funds 108
TSAA see term structure of available assets
TSCF see term structure of cash flows
TSECCF see term structure of expected cumulative cash flows
TSECF see term structure of expected cash flows
TSFCFu see term structure of forward cumulated funding
TSFu see term structure of funding liquidity
TSLaR see term structure of liquidity-at-risk
TSLe see term structure of expected liquidity
TSLGC see term structure of LGC
UBS 4
UFCs see unexpected funding costs
UK 6–7, 11, 12, 15, 41, 50–3, 57–8, 64, 68, 73, 80–1, 470–1
underlying assets 475–537, 539–45
see also derivatives
unencumbered assets 48–50, 54–74, 99, 101, 125–7, 144–98
see also liquidity coverage ratio
unexpected funding costs (UFCs)
confidence levels 526–8, 533–7
unexpected losses 152–63, 426–31, 432, 438–71, 525–8
see also credit VaR
unexpected market losses 427–31, 438–46
see also market VaR
Unicredit (UCG) 237–9, 253–6, 264–70
unsecured lending and borrowing 77–9, 124–7, 196–8, 490–1
unsecured wholesale funding runoff, definition 196
up-and-out call options 488–91
US 3–15, 33–45, 73, 76, 80, 81, 82–4, 95, 116–17, 126, 514–17
USG (usage) credit lines monitoring tool 339–41, 343–7
definition 339
value, price contrasts 421–3, 473–5, 508
value added (VA)
see also risk-adjusted return on capital
Value-at-Risk (VaR) 12, 48, 81, 100, 299–303, 309–16, 426–31, 432, 438–46, 447–72, 473–5, 526–8, 533–7
see also credit VaR; market VaR
variances 25, 187–91, 199–201, 202–13, 215–19, 229–31, 263–76, 304–5
variation margin 473–537, 542–3
Vasicek interest rate model 201, 202, 209, 319
vector of intensities, expected and minimum LGC of available bonds 228–31
see also options; volatilities
the vicious circle of liquidity types 24–9, 31–2, 33
‘virtual’ banks 9
the virtuous circle of liquidity types 24
Visinelli, Luca 199
volatilities 5, 9, 18, 48–50, 56–84, 89, 100, 116–17, 126–7, 135–41, 187–91, 199–213, 215–19, 257–70, 274–6, 288, 292, 300–3, 309–16, 318–37, 360–2, 373–8, 431–2, 434–71, 480–537, 543–5
see also implied …
forward risk-adjusted measure 274–6, 300–3, 441–6
Volcker rule 41
volume dynamics, deposits 319–37
Washington Mutual 7
Weidmann, Jens 20
weighted average funding curves 432, 446, 458–71
Wheatley Review in September 2012 80–1
wholesale funding 68, 76, 85–95, 96–7, 103, 105–8, 124–7, 196–8
crisis situations 68
Wiener processes 341
see also Brownian motion
withdrawal intensity, credit lines 337–9, 340–1, 342–7, 362–70, 545
see also credit lines
YEN 202
yield curves 281, 295, 313, 325, 373–8, 425–71
yield to maturity (YTM), components 544–5
yields 4–7, 95, 103, 120–3, 154–68, 281, 295, 313, 325, 373–8, 416–23, 425–71, 480–537, 544–5
YTM see yield to maturity
zero-coupon bonds 145, 201, 203–13, 215–19, 223–4, 235–9, 253–6, 262–70, 292–6, 405–19, 434–71, 494–9, 518–37