Liquidity Risk Management

2 days 27-28 Aug 2015, Hong Kong $3,850.00 Download brochure Add to basket
3 days 23-25 Nov 2015, London £3,645.00 + VAT* Download brochure Add to basket

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This course focuses on the best practices in measuring, managing and controlling liquidity risk undertaken by leading financial institutions after the lessons learned from the global financial crisis. The course tackles liquidity risk in conjunction with other risk categories such as interest rate and credit risk.

The course leads the attendees through all relevant liquidity risk measures that are being adapted to reflect the newly created complexities of modern financial markets such as analytics, forecasting, measurement and risk indicators and metrics. In addition, the course will cover the key areas of funds transfer pricing, stress testing, contingent planning and the new regulatory requirements under Basel III.

Key Objectives and Learning Outcomes

  • Identify what liquidity risk is and how its different types can be distinguished
  • Hear about the best practice within leading international banks
  • Develop a consistent methodology to measure, monitor and manage illiquidity risk
  • Understand the role of liquidity risk in the bank’s transfer pricing process and quantify its direct and indirect costs
  • Understand the requirements and impacts of liquidity regulations such as Basel III and learn how to manage them
  • Learn to model liquidity risk exposures and their mitigating strategies

Teaching methodology will include lectures, discussions and case studies.

Who should attend


  • CFOs, CROs
  • Liquidity Risk Managers
  • Treasury Executives
  • Market Risk Managers
  • Traders
  • Finance/Capital Planning Executives
  • Auditors (Internal & External)


We work with a series of expert instructors, please select the course location of interest to review the credentials of who will be delivering the programme.

The course director has spent over a decade in the treasury/dealing rooms of numerous international major banks like Banque Nationale de Paris and NatWest Markets as a money market liquidity manager where he traded interest rate products and derivatives. He has headed several ALM divisions and served numerous ALCOs. He was Head of Methodology and Policy, Liquidity & Treasury Risk at Deutsche Bank where he devised the methodology and successfully managed a project (LiMA), which still measures and limits the funding liquidity of Deutsche Bank Group. Subsequently, he coordinated the ALM and Liquidity Risk Solutions at Algorithmics Inc., Toronto. He was member of the board and Head of ALM & Risk Development at FERNBACH in Luxembourg.

He holds a PhD in Pure Mathematics and worked for several years in mathematical research. He is Founder of ALM Lab and Liquidity Risk Corp. (LRC), where he advises private banks, central banks and regulators on liquidity risk methodologies and helps to build software solutions to implement the resulting policies. He is a regular speaker at the Bank of International Settlements’ Financial Stability Institute in Basel.

Before and during the peak of the recent crisis he advised consultancies and various institutions including the ECB on liquidity risk measurement methodology. In the last years he helped banks (e.g. BNP Paribas Fortis) to build group-wide liquidity management solutions including modules for transfer pricing and Basel III.
Hong Kong

The course director is the Managing Director of a consultancy that works with financial institutions on risk related projects and issues. The focus of the consultancy is on the development and implementation of Enterprise Risk Management (ERM) programs and the component parts.

Before founding his consultancy, the course director was the Director of Integrated Risk Management Consulting Services for Metavante Corporation, a $2 billion technology firm focused on financial institutions.

He has almost 30 years of experience in financial institutions as a practitioner and a consultant. His first fifteen years were spent working for financial institutions of various size and complexity, and has spent the last twelve plus years in the business consulting arena. During his banking career, he worked in several areas of banking including credit, treasury services and operations.

During his consulting career he has worked with domestic and international financial institutions ranging in size from the community bank market to a US$1 trillion international financial institution. He has assisted banks as they have worked through regulatory orders and issues and been heavily involved in the roll out of advanced risk analytics including risk-based capital, the Basel II Accord and stress testing.

He has presented courses throughout the United States, Europe, the Middle East and Africa. Programs and workshops include the topics of Credit Risk, Market Risk, Operational Risk, Basel II and Strategic Planning. An area he has spent considerable time in is leading workshops for bank boards on the topics of corporate governance and risk management.

The course director has an undergraduate degree in Economics and an MBA from the University of Wisconsin. He is currently an adjunct professor for Webster University, teaching in their MBA program. He teaches Investment, Capital Markets and Management. Lastly, he has also authored several articles and white papers and is a sought after speaker at banking conferences.


Hong Kong

4-5 Star Hotel in Hong Kong

All of our courses are held in 4 – 5 star hotels, chosen for their location, facilities and level of service. You can be assured of a comfortable, convenient learning environment throughout the duration of the course.

Due to the variation in delegate numbers, we will send confirmation of the venue to you approximately 2 weeks before the start of the course. Course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.


Central London Hotel Venue

All courses are held at four or five star venues in Central London, Zone 1. We strive to provide you with a training environment of the highest quality, to ensure that the whole learning experience exceeds your expectations.

Your training venue will be confirmed by one of our course administrators approximately 3-4 weeks before the course start date.

Related Courses


Agendas are localised, please select your preferred location.

 Day 1

The global financial crisis and failures of financial institutions - Review, conclusions, and outlook

Case study: "The fall of Northern Rock - Britain’s biggest banking disaster"

  • History and business strategy of Northern Rock
  • Asset growth strategy and its funding consequences
  • Interaction funding mix and bank strategy
  • The economy/the markets
  • The sub-prime crisis, the run on Northern Rock and the consequences on liquidity
  • The aftermath of the run
  • What went wrong?
  • What can liquidity risk managers learn from the case?

Liquidity risk within the supervisory frame

  • General issues
    • Focus of the regulators
    • Regulatory responses to liquidity problems: Guarantees, recapitalisation, bad banks
    • Inter-relationship between liquidity regulation, capital adequacy and other prudential measures
  • Sound practices for managing liquidity in banking organisations
  • Basel III
    • Capital ratios and target
    • Contingent buffers
    • Systemic risk
    • Qualitative liquidity requirements
    • Liquidity coverage ratio
    • Net stable funding ratio
    • Monitoring tools for liquidity risk
    • RWA requirements
    • Implications for financial institutions
    • Capital demand under Basel III

Case study: Deutsche Bank 

  • Dodd-Frank Act, United States
  • Ringfencing -Vickers Report, United Kingdom
  • Where does it all go and what impacts do all regulatory changes have?

Analytical overview/governance 

  • Key bank performance indicators: What to achieve
    • Profitability
    • Growth
    • Capital adequacy
    • Liquidity
    • Leverage

Example: Deutsche Bank 

  • Defining liquidity risk: Funding and market liquidity
  • The relationship between capital adequacy, solvency and liquidity
  • Funding appropriate for the risk profile and commercial needs of the assets, products and business lines
  • Stability, diversity and tenor matching of funding sources
  • Key issues: Off balance sheet, derivatives, securitisation, intraday
  • Gap management across tenor and currency buckets
  • Strategy for liquidity risk, policies and practices
  • Inter-relationship between liquidity and other risk types
    • Interest rate risk, including discussion on current markets
    • Credit risk
    • Operational risk, legal risk and reputational risk
  • Liquidity profiles of large financial institutions

Liquidity risk as part of ALM - a policy framework 

  • Elements of modern asset liability management (ALM)
  • Policy scope and frame
  • Liquidity policy
  • Authorities and responsibilities
    • Organisational Issues
    • Board of Directors
    • Asset Liability Committee (ALCO)
    • Treasury
    • Risk Committee

Case study: Deutsche Bank

  • Funding mix
  • Liquidity reserves
  • Risk adjusted profitability
  • Risk taking capability
  • Management reports
  • Internal controls
  • Organisation of risk management

Intragroup liquidity transfers - Fund Transfer Pricing (FTP)

  • Overview of fund transfer pricing
  • Improvement of cash flows, earnings, risk and value through FTP
  • Alternative methods and addressing FTP objectives
  • Approach for implementation of FTP mechanism
  • Adjustment for other factors beyond the benchmark
  • Using the FTP for performance forecasting and measuring branch profitability
  • Incentives, policies and procedures
  • Practical challenges

Day 2

Forecasting, measuring and monitoring funding requirements

  • The components of the balance sheet
    • Accounting presentation vs. Liquidity view
    • The components on the asset side
    • The components on the liability side
  • Securitisation
  • Cash flow forecasting
    • Classification of items depending on certainty of timing and magnitude
    • Time buckets and granularity
    • Combining contractual and behavioural cash flows
    • Deterministic and stochastic behaviour of instruments
    • Statistical techniques
    • Simulations techniques - historical simulation and Monte Carlo simulation
    • Probability levels and holding period
  • Short-term and structural liquidity management
    • The Value-at-Risk (VaR) concept
    • Liquidity-at-Risk (LAR)
    • Liquidity Value-at-Risk (LVAR)
  • Scenarios
  • Trading/Derivatives issues
  • Risk buffers

Case study: Commerzbank 

    • Expected liquidity exposure
    • Dynamic liquidity exposure
    • Balance sheet liquidity
    • Available net liquidity

Managing liquidity risk - metrics and limits

  • Range of liquidity metrics
  • Maturity mismatch approach - gap analysis
  • Modelling behavioural adjusted liquidity gaps - best practices
  • Concentration risk
  • Market indicators
  • Liquidity ratios
    • Liquidity coverage ratio
    • Net stable funding ratio
    • Other ratios
      • Limits and risk tolerances
      • Internal and external communications

Examples: International banks 

Liquidity stress testing 

  • What is stress testing?
  • Why stress test liquidity?
  • Stress test priorities
  • Balance sheet items
  • Sensitivity and scenario analysis
    • Shock events
    • Other stress scenarios
    • The subprime crisis
    • Interest rate scenarios
    • Credit scenarios
  • Assumption sensitivity
  • Additional considerations
  • Reverse stress testing in practice for trading books

Contingency funding planning (CFP) 

  • Objectives of the CFP
  • Telltale signals
  • CFP strategy and organisation
  • Communication
  • Asset-related strategies
  • Liabilities-related strategies
  • Capital cushion

Day 1

The Financial Crisis of 2007-2009

  • What did happen?
    - Unrealistic business models and the resulting balance sheets
    - The eternal money generating machine: lend long and borrow short
    - Inadequately transfer pricing methods
    - Insufficient risk management
    - Deficient regulation and supervision
    - Collapse of money and repo markets
    - Fragile payment operations

Case studies: Northern Rock, German Landesbanks, Fortis and Dexia
Lessons from the crisis: learnt and forgotten

The Big Picture: Money Generation, Supply and Liquidity

  • Central banks and ‘fiat money’
  • Open market operations of the central bank
  • List of eligible assets
  • Money generation of commercial banks
  • Quantitative easing and its possible passing

Case studies: ‘Herstatt’, ‘ECB during the 2008 crisis’

The View of an Individual Bank

  • Financial transactions and their cash flows
  • The central bank nostro
  • Direct and indirect payments
  • The risks of the payment process
  • The risks of providing payment services for others

What is Liquidity? What is Liquidity Risk?

  • Key concepts: illiquidity and insolvency
  • Different types of liquidity risk
    - 1st degree liquidity risk: illiquidity risk
    - 2nd degree: liquidity induced value / earnings risks
  • Liquidity by term-structures: intra-day / short-term / long-term
  • Cash management vs. liquidity risk management

Liquidity Risk Exposure

Measuring Illiquidity Risk: The Forward Liquidity Exposure (FLE)

  • Starting with a static balance sheet 
  • Forecasting of the bank’s nostro 
  • Simulating the balance sheet as set of transactions
    - The bank’s complete set of transactions
    - External transactions
    - Internal & quasi-external transactions
  • The future payments of a transaction
  • Future payments with cash flows

Capturing Uncertainty with Cash Flows 

  • Expected cash flows (ECF)
  • Deterministic / non-deterministic cash flows
  • Floating cash flows (market simulations)
  • Conditional cash flows (client decision simulations)

Stochastic Concepts

  • Liquidity-at-Risk (LaR)
  • Cash-Flow-at-Risk (CFaR)
  • Value-Liquidity-at-Risk (VLaR)


Day 2 

Liquidity Risk Mitigation

 Why Capital is not a Buffer against the Lack of Liquidity

  • Capital and value risks (credit & market risk)
  • Shortness of funds: what can be done?
    - The bank’s ability to attract new funds
    - Creation of cash inflows through repo and sales of liquid assets

Liquid Assets 

  • Characteristics of liquid assets
  • Eligibility: available for the desired liquification process?
    - Encumberedness of assets
    - Liquification channels
  • Possession and ownership in time: the Forward Asset Inventory
  • Classification of liquifiability: the LiX of an asset

Liquidity Generation Strategies: The CounterBalancing Capacity (CBC)

  • Liquification classes
  • Liquification haircuts, value decays and upper limits
  • The liquification algorithm and its parameters
  • Scenarios for the CounterBalancing Capacity
  • Embedment of the CBC into the Gap Analysis (FLE)
  • Related Liquidity Generation concepts:
    - Liquidity Buffer, Day-Count-to-Default, Liquidity Barometer, Survival Horizon

Discussion: the Liquid Asset Buffer

  • Instruments to include
  • The right size
  • The funding
  • Optimizing costs

Integrating Dynamic Balance Sheet Behaviour

  • Why simulating a static balance sheet doesn’t make too much sense

Scenarios: Exposures and Strategies

  • Squaring the run-off balance sheet
  • Going-Concern and Business-As-Usual scenarios
  • Growth- and contraction-scenarios


  • Real Options and Liquidity Options
  • Contractual and non-contractual options
  • ‘Forgotten’ optionality: counterparty’s breach of contract
    - Credit risk adjustments and modelization of large defaults
    - Violation of liquidity and credit lines

Liquidity Units

  • The concept of subsets of the balance sheet which behave uniquely in a scenario

Liquidity Risk Stress Testing

  • Why stress testing is necessary for value risk (and why it is already embedded in the liquidity risk scenario methodology)
  • Overview of stress tests approaches

Workshop: Impact of various firm-specific and systematic stress events on liquidity risk metrics

Managing Liquidity Risk

  • Traffic light systems 
  • Limitation
  • Unadjusted limiting
  • CBC-adjusted limiting
  • Pricing of Liquidity (Risk)
  • Funding: term structured approach

Liquidity Contingency Plan

  • Essential components:
  • Defining stages, setting triggers, identifying potential responses, reporting requirements, communications requirements, testing

Intraday Liquidity Risk

  • Distinction between real intraday liquidity risks and enhanced FLE-type risks 
  • The payment process revisited
  • Risks in the bank’s proprietary payment process
  • Risks from payment services for clients 
  • Risks from using payment agents 
  • ‘Double use’ of collateral

Day 3

Governance – Views of Other Stakeholders

Rating Agencies

  • Risk of insolvency or illiquidity
  • Impact of a bank’s rating on its liquidity risk
  • Impact of liquidity risk on a bank’s rating


  • International regulations: Basel III - BCBS Consultative Document (Dec 2009)
    - BCBS LQR measures (liquidity coverage ratio + net stable funding ratio
    - BCBS LQR monitoring tools
  • National regulations issued by:
    - UK: FSA
    - DE: BaFin
  • Similarities and differences across regulations (stress testing assumptions such as survival horizons, definition of liquid assets,...)
  • Interrelationships between liquidity risk regulation, capital adequacy and other prudential measures
  • Other stakeholders: role of audit,..

Discussion: The Impact of liquidity risk regulation on banks’ business model

Liquidity Transfer Pricing

Best Practice (Funds) Transfer Pricing Methods and Processes

  • The purpose of Transfer Pricing: levelling the playing field or steering the balance sheet?
  • Generalized (Average Funding Rate) vs. individual (Match Funding) replication of originated transactions - objectives & challenges
  • The role of a central pricing department (treasury)
  • Multiple treasuries for interest rate, liquidity, collateral, credit, etc.

Transfer Pricing in a World with no Uncertainty

  • What is the ‘correct’ funding curve of the bank:
  • Risk neutral interest and structural liquidity costs
  • Funding instruments and venues

Integrating the Uncertainties of the Originated Transaction

  • Costs of expected and unexpected risks: credit, market and liquidity risk
  • Cost effects of credit risk and liquidity risk mitigation
  • Dealing with non-maturing instruments (with core and volatile parts)
  • Stochastic modelling of forecast & stochastic optimization

Integrating Regulatory Cost (from Basel III)

  • Total Net Cash Outflows & Stock of Highly Liquid Assets as a simplified FLE & CBC
  • The 75% rule: a simplified measure of uncertainty and a driver of costs
  • Differences between the regulatory and economic liquidity risk
  • The costs of improving the LCR / NFSR for the bank as a whole
  • How to split these cost between treasury and originating departments

Advanced Transfer Pricing Issues

  • Asset and liability driven banks
  • Dynamic vs. Static Balance Sheet Assumptions
  • Alternative funding curves for over / under funded time intervals
  • What is the right funding tenor of transaction from the trading book
  • Can transfer pricing substitute limiting?

Discussion: How to embed liquidity risk in banks’ pricing systems?

Course summary and close

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