liquidity risk management
R&C: Although liquidity management has always been a central treasury function, only recently has liquidity risk been recognised as a primary risk. What changed?
Tawfik: In the three decades since the advent of modern quantitative risk management, it has been assumed that markets were rational and efficient. This meant that the only risk facing a high quality asset was market risk. More specifically, an asset of a low credit risk should always have a viable market price. The 2008 financial crisis proved otherwise. Systemic liquidity stress caused assets of high credit quality to suffer major price dislocations. This resulted in the recognition of liquidity risk as a legitimate primary risk. Consequently, the need for the development of rational liquidity risk management methodologies and, in many cases, an independent liquidity risk management function, became apparent.
Oct-Dec 2019 Issue