7Lecture7liquidity

7Lecture7liquidity - Liquidity Risk 1 1. Causes of...

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1 Liquidity Risk
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2 1. Causes of Liquidity Risk FI issue Liquid Secondary securities to fund less liquid primary securities Risks? Drain in Deposits New Loan demand
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3 Example 1 Deposit Drain Bank D 100 E 10 R L S Assume Deposit Outflows = $10 Bank D E R L S Kd=10% Liquidity RR= ER=
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4 What if Bank D 100 E 10 R L S Assume Deposit Outflows = $10 Bank D E R L S Kd=10% Liquidity RR= ER=
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5 Options ? Bank D E Res L S Cost? Bank D E Res L S Cost? Call $9 in Loans Sell $9 of Securities
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6 Options ? Bank D E Res L S Cost? Bank D E Res L S Cost? Use Discount Window Borrow from other banks Borrow from BOC at the discount rate ( usually lower than the market rate) DB B
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7 Options How to escape from these costs?
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8 Example 2 Bank Failure Bank (mln) D 100 E 10 Res L S Rumor President of the bank took $20 mln and fled the country RR= ER= Liquidity Kd=10%
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9 Bank (mln) D E Res L S Liquidity?
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10 Assume you sell $19 of Loans to raise $8 Bank Res L S D E
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11 Liquidation !
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12 Example 3 Loan Commitment
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This note was uploaded on 02/28/2012 for the course FINE 442 taught by Professor Larbihammami during the Spring '12 term at McGill.

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7Lecture7liquidity - Liquidity Risk 1 1. Causes of...

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