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Vacatures in Riskmanagement

The impact of liquidity spread risk on banks’ earnings

Bron: Artikel Pieter de Boer en Geert Jan den Hartog, Zanders - 22 oktober 2018

What exactly are liquidity spreads and liquidity spread risk? And how can banks incorporate liquidity spread risk into their risk management framework?

Typical retail banks often use short-term funding such as customer deposits to fund long-term loans. The profitability of this business activity is highly dependent on the pricing of the deposits and loans. External client rates can be split up in an interest-rate component, a liquidity spread and a margin covering, for example, operational and credit risk. To limit the risk of a decline in profitability, banks often hedge the interest-rate risk as part of their risk management framework. Since the global financial crisis of 2007-2008, it has become clearer that the liquidity spread also has a significant impact on profitability. However, the measurement and hedging of liquidity spread risk is still at an early stage in the banking sector.

In this article we use a stylized example to illustrate the impact of liquidity spread risk on banks’ earnings. Furthermore, we discuss which challenges banks face regarding the management of  liquidity spread risk.

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