A Quantitative Liquidity Model for Banks by Christian Schmaltz

By Christian Schmaltz

Internal liquidity types for banks have won substantial significance seeing that German regulators have determined to simply accept them for regulatory reporting. Christian Schmaltz identifies product funds flows, investment unfold, investment capability, haircuts, and momentary rates of interest as key liquidity variables. Then, he assumes particular stochastic procedures for the main variables resulting in a selected liquidity version. The modelling concentration lies at the product funds movement that's defined by way of a jump-diffusion strategy. ultimately, the writer applies the version to the allocation, inner pricing, and optimization of liquidity.

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Concerning the term ’maturity’, we use the following convention: maturity always refers to the liquidity maturity if not stated differently. Furthermore, we will use the idea of separating long-term interest rates from liquidity management in future chapters. 4 Liquidity Options Bank products vary in the flexibility that they provide to customers. On the one hand, there are products that fix amounts and dates of payments – amortizing loans are an example. There is no flexibility left for the customer.

Secondly, we discuss advantages and disadvantages of potential modelling approaches. Thirdly, we choose an approach. Each specified process can be considered a sub-model. The complete set of sub-models constitutes our bank liquidity model. Chapter 5 discusses liquidity management. This is an additional column compared to the models in the literature that assume that liquidity is managed in one department. We analyze whether the one-department structure is suitable for banks. If multiple departments are involved we have to detail how (transfer model) and at which prices (transfer pricing) liquidity is transferred between departments.

Cash management models manage short-term, debt management models longterm cash flows. An integrated model to describe short and long-term cash flows is desirable. Our model accounts for this point. 2. Model describes product and aggregate liquidity Liquidity is managed on the aggregate level (Liquidity Management). However, liquidity is priced on the product level (Liquidity Controlling). In fact, the liquidity cost and benefits of products have to be incorporated in product pricing. In contrast to the literature that starts on the aggregate level, we base our modelling on the product level and subsequently aggregate to reach the management level.

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