13.1 Liquidity Gaps

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:

Figure 13-1 Formula to calculate the liquidity gap

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 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 Business-As-Usual (BAU) Run.