Quantification of Structural Liquidity Risk in Banks

Structural liquidity risk is a material risk resulting from the core banking business of taking in short-term deposits and lending out long-term loans, thus allowing a maturity mismatch between assets and liabilities. At some point the long-term loans will require refinancing and the institution is at risk of an adverse development of refinancing costs.

This book proposes a model for the quantification of structural liquidity risk and describes the underlying methodology and assumptions for stressing the refinancing costs. The change in present value between closing open liquidity positions under stressed refinancing costs compared to current costs is the calculated impact on risk-bearing capacity.