FIN 701 Lecture Notes - Lecture 38: Libor, Interbank Foreign Exchange Market, Liquidity Risk
13 Apr 2016
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Document Summary
The global financial crisis of 2008 2009 was, in part, due to liquidity risk. As mortgage and mortgage-backed securities markets started to experience large losses, credit markets froze and banks stopped lending to each other at anything but high overnight rates. Liquidity risk arises for two reasons: a liability-side reason and an asset-side reason. For a dti to be growing, it must have a mean or average deposit drain such that new deposit funds more than offset deposit withdrawals. Thus, the peak of the net deposit drain probability distribution would be at a point to the left of zero. See the -2 percent in panel b in figure 12 1, where the distribution of net deposit drains is peaked at -2 percent, or the fi is receiving net cash inflows with the highest probability. Purchased liquidity management: an adjustment to a deposit drain that occurs on the liability side of the balance sheet: o.
