Abstract
Original language  English 

Awarding Institution 

Supervisors/Advisors 

Award date  14 Dec 2011 
Place of Publication  Enschede 
Publisher  
Print ISBNs  9789036532990 
DOIs  
Publication status  Published  14 Dec 2011 
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Keywords
 IR78851
 METIS280692
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Liquidity Risk meets Economic Capital and RAROC. A framework for measuring liquidity risk in banks. / Loebnitz, K.
Enschede : University of Twente, 2011. 138 p.Research output: Thesis › PhD Thesis  Research UT, graduation UT › Academic
TY  THES
T1  Liquidity Risk meets Economic Capital and RAROC. A framework for measuring liquidity risk in banks.
AU  Loebnitz, K.
PY  2011/12/14
Y1  2011/12/14
N2  Liquidity risk is a crucial and inherent feature of the business model of banks. While banks and regulators use sophisticated mathematical methods to measure a bank's solvency risk, they use relatively simple tools for a bank's liquidity risk such as coverage ratios, sensitivity analyses, and scenario analyses. In this thesis we present a more rigorous framework that allows us to measure a bank's liquidity risk within the standard economic capital and RAROC setting. In particular, we introduce the concept of liquidity cost profiles as a quantification of a bank's illiquidity at balance sheet level, which leads subsequently to the concept of liquidityadjusted risk measures defined on the vector space of balance sheet positions under liquidity call functions. We study the modelfree effects of adding, scaling, and mixing balance sheets. In particular, we show that convexity and positive superhomogeneity of the underlying risk measures is preserved in terms of positions under the liquidity adjustment, given certain moderate conditions are met, while coherence is not, reflecting the common idea that size does matter in the face of liquidity risk. We also show that a liquidityadjustment of the wellknown Euler capital allocation principle is possible without losing the soundness property that justifies the principle. However, it is in general not possible to combine soundness with the total allocation property for both the numerator and the denominator in liquidityadjusted RAROC. Liquidityadjusted risk measures could be a useful addition to banking regulation and bank management as they capture essential features of a bank's liquidity risk, can be combined with existing risk management systems, possess reasonable properties under portfolio manipulations, and lead to an intuitive risk ranking of banks.
AB  Liquidity risk is a crucial and inherent feature of the business model of banks. While banks and regulators use sophisticated mathematical methods to measure a bank's solvency risk, they use relatively simple tools for a bank's liquidity risk such as coverage ratios, sensitivity analyses, and scenario analyses. In this thesis we present a more rigorous framework that allows us to measure a bank's liquidity risk within the standard economic capital and RAROC setting. In particular, we introduce the concept of liquidity cost profiles as a quantification of a bank's illiquidity at balance sheet level, which leads subsequently to the concept of liquidityadjusted risk measures defined on the vector space of balance sheet positions under liquidity call functions. We study the modelfree effects of adding, scaling, and mixing balance sheets. In particular, we show that convexity and positive superhomogeneity of the underlying risk measures is preserved in terms of positions under the liquidity adjustment, given certain moderate conditions are met, while coherence is not, reflecting the common idea that size does matter in the face of liquidity risk. We also show that a liquidityadjustment of the wellknown Euler capital allocation principle is possible without losing the soundness property that justifies the principle. However, it is in general not possible to combine soundness with the total allocation property for both the numerator and the denominator in liquidityadjusted RAROC. Liquidityadjusted risk measures could be a useful addition to banking regulation and bank management as they capture essential features of a bank's liquidity risk, can be combined with existing risk management systems, possess reasonable properties under portfolio manipulations, and lead to an intuitive risk ranking of banks.
KW  IR78851
KW  METIS280692
U2  10.3990/1.9789036532990
DO  10.3990/1.9789036532990
M3  PhD Thesis  Research UT, graduation UT
SN  9789036532990
PB  University of Twente
CY  Enschede
ER 