Banks are intermediaries between liquidity supplying depositors and liquidity demanding borrowers.1 Furthermore, they provide contingent liquidity in the form of loan commitments and liquidity backup lines. Importantly, liquidity is a core resource for banks that needs to be actively managed. For that purpose, we will develop a quantitative model of bank liquidity. Consequently, our model must be stochastic, complete, and will incorporate bank particularities. Here, completeness refers to the fact that the model encompasses product and aggregate as well as short and long-term liquidity. Significantly, an important particularity of banks’ business that our model addresses is confidence. Incidentally, liquidity modelling is only the starting point for liquidity management, and we therefore discuss modelling, managing and optimizing liquidity.
KeywordsInterest Rate House Price Credit Risk Liquidity Model Liquidity Management
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