Liquidity is the ability to meet payments when they fall due without incurring unacceptable losses. Funding risk concerns the availability and cost of the money used to support assets and operations. A bank can be profitable, and even have positive equity, while still lacking usable cash in the currency or location where a payment is due.

This module introduces the liquidity coverage ratio and net stable funding ratio, then moves to cash survival, funding concentration, collateral and management actions. The ratios provide structured regulatory views, while a cash forecast shows when a shortage may occur. Collateral capacity and funding plans add another question: can the proposed resources actually be mobilised in time?

Use the default examples to understand the distinction between a stock of assets, a dated cash flow and a potential funding action. Then change withdrawals, inflows or funding assumptions and trace the effect on the remaining buffer. The examples use selected Basel rules where stated and synthetic assumptions elsewhere. The Treasury Risk Lab extends these ideas into a broader balance-sheet decision process.

Continue your learning: Treasury risk · Interest-rate risk in the banking book · Yield curves and bootstrapping

Look up a term as you work through the examples. Definitions explain the terminology; the source references and assumptions beside each lesson explain the scope of its calculation.

32 definitions

Asset

An asset is a resource or contractual right with economic value. For a bank, examples include cash, securities and loans that customers are expected to repay.

Basel, BCBS and IOSCO

The Basel Committee on Banking Supervision develops international prudential standards for banks. IOSCO is the International Organization of Securities Commissions. International standards require the relevant jurisdictional implementation before they can be treated as local rules.

Call and put

A call gives the holder the right to buy the underlying on the contract’s terms. A put gives the right to sell it. The holder’s exercise choice makes the payoff asymmetric.

Cash flow

A cash flow is a payment or receipt at a specified time. Its amount, date, currency and legal owner affect both valuation and liquidity.

Collateral

Collateral is cash or another eligible asset provided to secure an obligation. Its protection depends on value, legal enforceability, availability and the time required to realise it.

Concentration

Concentration means that a large share of exposure or funding depends on a small number of sources or common drivers. The Herfindahl–Hirschman Index, or HHI, sums squared shares to measure size concentration but does not by itself measure behavioural dependence.

Correlation

Correlation summarises a specified relationship between two variables. A linear correlation does not fully describe joint tail behaviour, and a prescribed regulatory correlation is a model parameter rather than a measured relationship for every portfolio.

Day-count convention

A day-count convention converts dates into year fractions for interest and valuation. For example, actual/365 uses the actual number of days divided by 365; other conventions produce different accrual fractions.

Diversification

Diversification is the reduction in aggregate risk that can arise when positions do not experience adverse outcomes together. Its benefit depends on the chosen risk measure, dependence assumptions and any regulatory aggregation rules.

Encumbrance

An encumbered asset is pledged or otherwise restricted in a way that limits its availability. An unencumbered asset is not automatically usable immediately; eligibility, location and operational readiness still matter.

Equity

Equity represents an ownership interest. On a bank balance sheet, equity is the residual interest in assets after liabilities; in a market-risk example, an equity position usually means shares in a company.

Funding and rollover risk

Funding supports assets and payment obligations through deposits, borrowing and other sources. Rollover risk is the risk that maturing funding cannot be replaced at an acceptable cost or at all.

Haircut

A haircut reduces the recognised value of collateral or an asset pool for a specified calculation. It accounts for the relevant risk or rule and is not necessarily the price discount obtained in an actual sale.

HQLA

High-quality liquid assets are assets meeting the relevant liquidity-standard eligibility and operational criteria. Level 1, Level 2A and Level 2B classifications carry different prescribed haircuts and composition constraints.

Independence

Variables are independent when learning the value of one does not change the probability distribution of the other. This is stronger than having zero linear correlation.

Intraday liquidity

Intraday liquidity is the ability to meet payment and settlement obligations during the day. A positive closing cash balance can hide an earlier shortage if outgoing payments precede incoming funds.

LCR

The liquidity coverage ratio compares adjusted HQLA with prescribed net cash outflows over a 30-day stress period. The general inflow cap limits how much expected inflow can reduce the denominator, subject to applicable exceptions.

Liquidity and solvency

Liquidity concerns the ability to meet obligations when due. Solvency concerns the ability of assets and loss-absorbing resources to cover liabilities and losses; a solvent institution can still face a timed cash shortage.

Long and short positions

A long position generally benefits from ownership or a rise in the relevant instrument’s value. A short position has the opposite exposure. For complex derivatives, the precise payment and sign convention should always be checked.

Maturity

Maturity is the date or remaining period until a contract ends or principal becomes due. It can differ from an instrument’s next interest-rate reset or an option’s expiry.

Netting set

A netting set contains transactions that can be combined under the relevant legally recognised agreement and calculation rules. Economic offsets across different legal sets do not automatically qualify as regulatory or collateral offsets.

NSFR, ASF and RSF

The net stable funding ratio compares available stable funding with required stable funding. ASF weights funding sources by the applicable stability treatment, while RSF weights assets and other requirements by their need for stable funding.

PRA

The Prudential Regulation Authority is the UK prudential supervisor for the firms within its remit. PRA rules, supervisory statements and consultation proposals have different roles and legal status.

Reconciliation

Reconciliation compares records or results and traces differences to their source. For risk calculations, this includes trade population, valuation time, units, currency, mapping, assumptions and model version.

Regulatory capital and RWA

Regulatory capital is eligible loss-absorbing funding measured under the applicable rules. Risk-weighted assets express exposures or requirements on a risk-adjusted basis and are used with capital ratios; an exposure amount is not automatically a capital charge.

Repo

A repurchase agreement raises cash against securities under an agreement to reverse the transaction. It creates a funding and repayment relationship and differs from an outright asset sale.

Risk-neutral measure

A risk-neutral measure is a pricing probability measure under which suitably discounted traded asset prices are martingales under the model’s conditions. Its probabilities are pricing weights and need not represent a real-world forecast.

Runoff

Runoff describes the amount or fraction of a funding balance assumed to leave over a specified period. A regulatory runoff rate and an internally chosen behavioural stress assumption are different inputs.

Settlement

Settlement is the completion of a payment or delivery obligation. A settlement lag separates the trade date from completion and can create cash needs and exposure before the exchange is final.

Stress calibration

Stress calibration uses a defined adverse market period or scenario to set a model’s risk scale. The data window, factor set and aggregation method determine what the resulting stressed measure represents.

Survival probability

Survival probability is the probability that default has not occurred by a specified time. Its decline across an interval gives the probability of first default during that interval under the model.

Wholesale and retail funding

Retail funding generally comes from individual customers or qualifying small businesses, while wholesale funding comes from financial markets and larger institutional sources. Regulatory classifications and stability assumptions require more detail than these broad labels.