Enterprise Risk Management at ABN AMRO

Details

Themes: -
Period : 2003
Organization : ABN AMRO
Pub Date : 2003
Countries : Global
Industry : Banking

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Case Code : ERMT-023
Case Length : 19 Pages
Price: Rs. 300;

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Market Risk Contd...

Liquidity Risk
Liquidity risk was an integral part of ABN Amro's business. Liquidity risk would arise if, for example, the bank was unable to fund its portfolio of assets at appropriate maturities and rates or was unable to liquidate a position in a timely manner at a reasonable price.

ABN Amro managed liquidity on a daily basis throughout the 66 countries and territories in which it operated. Each national market was unique in the scope and depth of its financial markets, competitive environment, products and the characteristics of its customer profile. Local line management was therefore responsible for managing local liquidity requirements under the supervision of Group ALCO. Each location needed to comply with local liquidity regulations. On a day-to-day basis, ABN Amro's liquidity management depended on the proper functioning of local and international financial markets. The bank had established group-wide contingency funding plans that anticipated changes in the bank's structural liquidity under different scenarios and set out damage-limitation procedures in case of crises. These plans could be activated in the event of a dramatic change in the normal business activities or in the stability of the local or international financial markets.

As part of its liquidity management contingency planning process, ABN Amro regularly assessed potential trends, demands, and commitments, events and uncertainties, which might have an impact on structural liquidity. More specifically, ABN Amro considered the impact of these potential changes on the bank's sources of short-term funding and its long-term liquidity planning horizons.

At a group level, stress testing of liquidity was conducted several times a year and the outcomes were reported to Group ALCO. To mitigate the liquidity risk, the bank had a liquidity buffer consisting of unencumbered liquid assets, such as marketable securities and other short-term investments. These included Dutch government bonds, US Treasury and US government agency paper and other OECD government paper, which could be readily converted into cash. The size of the liquidity buffer was linked to the outcomes of these stress tests.

At all times, on a group-wide basis, the bank maintained what it believed were adequate levels of liquidity to meet deposit withdrawals, to repay borrowings and to fund new loans, even under stress conditions.

The ability to sell assets (apart from marketable securities) quickly was an additional source of liquidity for the bank. The bank's loan syndication and securitization programmes were part of liquidity management activities. ABN Amro believed the diversity of the banks funding sources and funding providers increased funding flexibility and limited dependence on any source of funds. The bank was an active participant in the capital markets, issuing commercial paper and medium-term notes, as well as debentures, subordinated debt and preferred stock. Diversity of funding products, market and maturity played an important role in funding decisions.

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