This section provides information about the following:
Liquidity gap is the mismatch in a bank’s inflows and outflows from various assets and liabilities, due to the difference in the behavior exhibited by the customers. This gap can be positive or negative, depending on whether the bank has more inflows than outflows and vice versa. The liquidity gap can change over the course of each day based on the deposits and withdrawals made and other behavior of the bank as well as its customers.
Liquidity gap is calculated as follows at each user-specified time bucket:
Oracle Financial Services Liquidity Risk Management computes the liquidity gap under contractual terms, business-as-usual conditions, and stress scenarios. The liquidity gap status under contractual terms is computed based on the cash flows received from an ALM system. Business-as-usual and stress business assumptions are applied to contractual cash flows to obtain gaps under BAU and stress scenarios. The process of creating a business assumption is detailed in Defining a New Business Assumption section. The process of creating contractual and business-as-usual Runs is detailed in Defining a Contractual Run and Defining a Business-as-Usual Run sections respectively and stress Runs in Defining a Stress Run section.
Cumulative Gap is the net gap from today up to a given time horizon or time bucket in the future. It is calculated as the sum of liquidity gaps from the first time bucket up to each future time bucket. The cumulative gap can be positive or negative, depending on whether cumulative inflows are greater than the cumulative outflows and vice versa.
The cumulative gap is computed as follows:
Where,
T: Each time bucket
N: Total number of time buckets
The cumulative gap is computed under contractual terms, business-as-usual conditions and stress scenarios.
In the following example, Numerical Example (in $).
Time Bucket |
1-14 Days |
15-28 Days |
29 Days - 3 Months |
3-6 Months |
|---|---|---|---|---|
Inflows |
500 |
300 |
1000 |
2000 |
Outflows |
200 |
500 |
1250 |
1500 |
Liquidity Gap |
300 [=500-200] |
-200 [=300-500] |
-250 [=1000-1250] |
500 [=2000-1500] |
Cumulative Gap |
300 |
100 [=300+(-200)] |
-150 [=100+(-250)] |
350 [=-150+500] |
In the preceding example, the cumulative gap at the end of 6 months works out to $350 whereas the liquidity gap in the 3-6 months’ time bucket is $ 500.
NOTE:
This calculation occurs at the reporting layer.