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

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
• 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
• Additional Information: Author's accepted manuscript of article published in International journal of finance and economics, 2014, v.19 issue 3.
• Contract Date: Nov 23, 2017