Liquidity Management and Cash Flow Forecasting
Liquidity management ensures the institution can meet obligations as they fall due, at a reasonable cost, in both normal and stressed conditions. The exam tests both views of liquidity: the stock of liquid assets held as a buffer, and the flow of cash through a maturity ladder that must be forecast, stressed and funded.
The stock view
LCR = high-quality liquid assets (HQLA) divided by net cash outflows over 30 calendar days, minimum 100%. HQLA is haircut, and caps apply: Level 2 assets may not exceed 40% of the buffer and Level 2B no more than 15%. Inflows are capped at 75% of outflows. NSFR = available stable funding divided by required stable funding, minimum 100%, addressing structural funding rather than a 30-day shock. Undrawn committed facilities are outflows, never inflows.
The flow view
Forecast horizons run from intraday, to daily for 0-7 days, weekly to a month, monthly to a year, then a strategic annual view. Build the forecast by counterparty and instrument, separating contractual flows from behavioural ones. Core non-maturity deposits are estimated through stable-balance analysis, not by product label. Stress the ladder under idiosyncratic, market-wide and combined scenarios, and hold a contingency funding plan with triggers, early warning indicators and pre-arranged sources.
Worked example
HQLA after haircuts is 18bn. Stressed outflows are 22bn and inflows 6bn, well below the 75% cap of 16.5bn, so net outflows are 16bn and LCR = 112.5% - compliant but thin. If the deposit run-off assumption is raised by 3bn, net outflows become 19bn and LCR falls to 94.7%, a breach. The desk must pre-fund, lengthen funding, or add HQLA before the assumption is formally adopted.
Traps that cost marks
Counting committed lines as inflows; assigning zero run-off to deposits without behavioural evidence; ignoring intraday liquidity and collateral calls; forecasting only contractual cash flows.