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Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector

Yan, Meilan; Hall, Maximilian J.B.; Turner, Paul

Authors

Maximilian J.B. Hall

Paul Turner



Abstract

This paper uses a relatively new quantitative model for estimating UK banks' liquidity risk. The model is called the exposure-based cash-flow-at-risk (CFaR) model, which not only measures a bank's liquidity risk tolerance but also helps to improve liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997–2010, we provide evidence that there is variable funding pressure across the UK banking industry, which is forecasted to be slightly illiquid with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC's cash flow will drop below £0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB's cash flow is the most volatile of the six biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow.

Citation

Yan, M., Hall, M. J., & Turner, P. (2014). Estimating liquidity risk using the exposure-based cash-flow-at-risk approach: an application to the UK banking sector. International journal of finance & economics : IJFE, 19(3), 225-238. https://doi.org/10.1002/ijfe.1495

Acceptance Date Jan 22, 2014
Online Publication Date Mar 14, 2014
Publication Date Jul 28, 2014
Deposit Date Jan 14, 2016
Publicly Available Date Nov 23, 2017
Journal International journal of finance and economics
Print ISSN 1076-9307
Electronic ISSN 1099-1158
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 19
Issue 3
Pages 225-238
DOI https://doi.org/10.1002/ijfe.1495
Keywords Liquidity risk; Exposure-based CFaR; Risk management; Funding pressure
Public URL https://hull-repository.worktribe.com/output/384093
Publisher URL http://onlinelibrary.wiley.com/doi/10.1002/ijfe.1495/abstract
Copyright Statement ©2016 University of Hull
Additional Information Author's accepted manuscript of article published in International journal of finance and economics, 2014, v.19 issue 3.

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