2015-11-17-奥纬咨询-Liquidity_Risk_6页_194kb

Liquidity Risk Summary

Core Content

Liquidity risk is a critical but often underestimated threat to corporate stability, particularly in the wake of financial crises and ongoing global economic uncertainty. This document outlines the challenges companies face in managing liquidity risk and highlights the need for a more comprehensive and integrated approach.

Main Points

1. Liquidity Risk Management is Not a Priority for Many Non-Financial Companies

• Despite increased capital reserves, many non-financial businesses have not improved their liquidity risk analysis and mitigation capabilities.
• A study by the UK Financial Conduct Authority found that most commodity traders do not incorporate stress testing or scenario analysis into their liquidity risk assessments.
• Oliver Wyman research indicates that even among commodity-driven industrial conglomerates and asset-backed traders, best practices in liquidity risk management are not consistently applied.

2. Five Common Mistakes in Liquidity Risk Management

• Narrow Risk Perimeter: Companies often focus only on market risks, ignoring credit and operational risks that can also lead to liquidity shortfalls.
• Overlooking Tail Events: Few businesses analyze extreme, low-probability events that could have significant impacts on liquidity.
• Underestimating the Importance of Time: Many companies assess liquidity requirements over a short period and apply them over a longer timeframe, failing to account for seasonal or event-driven changes.
• Misjudging Funding Risks: Companies rarely consider the risks of sudden lender withdrawal or reduced funding from corporate treasuries.
• Operating in Silos: Liquidity risk is often managed by a single department or team, leading to fragmented analysis and missed interdependencies.

Key Information

Liquidity Risk is a Major Cause of Corporate Bankruptcy

• The financial crisis demonstrated that liquidity risks are the most damaging to a company’s survival.
• Liquidity risks often arise when multiple risk factors (market, credit, operational) coincide, creating a "perfect storm."

Best Practices in Liquidity Risk Management

• Comprehensive Liquidity Assessment: Evaluate all sources and uses of liquidity.
• Robust Risk and Reserve Calculations: Accurately model potential liquidity shortfalls.
• Thorough Stress Testing: Simulate extreme scenarios to understand the impact of liquidity shocks.
• Integrated Risk and Finance Evaluations: Ensure collaboration across risk, treasury, and financial planning departments.

Multidisciplinary Approach is Essential

• CFOs and CROs must collaborate to ensure all departments contribute to liquidity risk analysis.
• Companies should compile an exhaustive risk register that includes various liquidity risks and assess their likelihood and impact.
• They should evaluate liquidity requirements for both "business as usual" and stressed scenarios, including rare events (e.g., once in 20, 100, or 1,000 years).

Conclusion

To avoid repeating the mistakes of the past, companies must adopt a more proactive and integrated approach to liquidity risk management. This includes analyzing all types of risks, considering tail events, accounting for time-related factors, and fostering cross-departmental collaboration. By doing so, they can better prepare for potential funding shortfalls and ensure long-term financial resilience.

Exhibits Mentioned

• Exhibit 1: The Five Common Mistakes in Liquidity Risk Management
• Exhibit 2: Forecasting Funding Shortfalls – A Multidisciplinary Approach

Authors

• Alexander Franke – Zurich-based partner at Oliver Wyman
• Ernst Frankl – Frankfurt-based partner at Oliver Wyman
• Adam Perkins – London-based engagement manager in Oliver Wyman’s Energy practice