Liquidity Risk Management

Risk is present in every aspect of our life, from our personal daily activities to business activities.  

Liquidity risk is a topic that involves businesses, investors, financial institutions, and so on, concerning their ability to meet debt obligations. Liquidity risk management, therefore, helps organizations to mitigate their risks, by developing proper strategies and actions to ensure that the negative effects of such risks are minimized. 

Liquidity risk measurement ratios, on the other hand, are used in cases when investors, managers, or businesses want to decide on the risk level within their organization.

In the last decades a lot of effort has been put to understand the risk and its nature, and that has led people towards the creation of risk management methodologies and frameworks. ISO 31000 provides one of the most known frameworks for addressing risks, an international standard that includes principles, proven best practices, and guidelines on risk management. 

PECB offers the ISO 31000 risk management training courses, which have had a great success and shown to be highly appreciated by all candidates. 

Liquidity risk management is very important, in regards to managing market and operational risks, since liquidity risk tends to compound other risks as well. Therefore, it is important for organizations to define the risk tolerance or the risk that the organization is willing to accept. In this way, risk tolerance will ensure that the organization is able to manage its risk liquidity. 

Thus, the organization should articulate risk tolerance in a way that the whole management of the organization understands, in the best way possible, the trade-off between profits and risks.  

The three main steps for a proper liquidity risk management

1. Establish an analytic framework for risk calculation
   Minimize the liquidity risks by analyzing their effects, which enable you to act prior to any risks and avoid unpleasant shocks
2. Manage your data
   Keep and update the newest market information and views on liquidity risks
3. Integrate the processes of risk management
   Instantly evaluate the impact of the risk liquidity and the possible impacts of the market shocks or scenarios

Measuring and managing liquidity risks

The organization should be able to identify, measure, monitor, and control its liquidity risks. 

It is also important for organizations to conduct continual tests regarding several market scenarios, in order to identify any potential liquidity risks and ensure that such risks are in accordance with the established liquidity risk tolerance of the organization. Day-to-day analysis of future outflows and inflows of cash will also help and provide useful information regarding liquidity risks and their management. 

Hence, organizations should be able to set out strategies and processes that need to be followed in case any liquidity risk emergency situation is to be present. 

Another good practice would be the development of policies and procedures, including here the best practices to help the business towards managing liquidity risk in accordance with tolerated risk. Such policies and procedures should be reviewed, at least on an annual basis, to ensure that the liquidity risk is managed effectively. 

Complying with liquidity risk management frameworks

In order to have a proper liquidity risk management within your organization, it is important to comply with all the applicable rules and regulations, even on a local level or the ones put by your own organization, in order to avoid future unpleasant situations. A liquidity risk management framework helps organizations maintain sufficient liquidity and ensure that the organization is in a proper position to address the daily obligations of liquidity and manage situations of high liquidity risks that may be present. 

PECB’s ISO 37301 Compliance Management System training course helps you to establish, develop, implement, evaluate, maintain, and continually improve a compliance management system (CMS). Hence, a CMS provides organizations and businesses with the proper approach to meet all the necessary compliance obligations by following the applicable laws and regulations, and avoiding possible risks that the organization may face.

If you want to know more about risk management or compliance-related PECB certifications and training courses, contact us at marketing@pecb.com.