Viewpoint on liquidity management

April 2010
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Liquidity Risk Management: Staying Afloat in Choppy Seas

At a glance

This report offers PwC's point of view on the potential for liquidity risk management as an overall strategy to balance liquidity considerations and the pursuit of revenue growth and a framework that adequately supports the liquidity risk management process.

With the worst of the financial crisis seemingly in the past, those financial institutions and corporations that were able to tap adequate sources of liquidity to survive may be tempted to believe that their liquidity risk management capabilities are sufficient or may scale back plans to enhance their liquidity management capabilities. However, in our view, firms should not assume that, simply because they weathered the recent storm intact, they are necessarily well-positioned to survive another liquidity crisis. At the same time, firms that overestimate their liquidity needs and maintain too much excess liquidity also risk sacrificing revenue and growth opportunities.

Leading financial institutions are reflecting on the lessons learned from the financial crisis and preparing for a new reality. In addition to meeting regulatory expectations, firms that develop and implement updated liquidity practices can substantially enhance their ability to support daily liquidity needs and maintain operations even during periods of heightened stress. These increased capabilities may also improve the confidence of financial institutions’ counterparts, thereby reducing systemic risk and helping to keep capital markets functioning even in the wake of liquidity events.

There is no “one size fits all” approach to managing liquidity risk. Liquidity risk management should develop qualitative and quantitative elements in a coordinated fashion, understanding that these elements are interrelated.