Page 65 - Risk Management in current scenario

considering the assumption the liquid assets. The Second issue to consider
is, “ too much” selling would send the message of distress to the market
and the Company may get lower value of assets which should be
incorporated in the LCR ratios.

Stress testing
The measurements described above measures the base liquidity risk
however it does not tests the tail risks under the extreme scenario. Using
different products, assets and market scenario, stress test describe the
‘tail” of liquidity risk facing the company. The stress test will test the
Company’s expected liquidity adequacy in a extreme market and business
condition. Some of the commonly prescribed stress tests under
CRO Forum liquidity guidelines are:
X Testing for mass lapse
X Increase in withdrawal due to increase in interest rate, e.g. the
interest rate shock could be 300 bps

X Increase in unprecedented demand for cash over the short period
of time due to catastrophe events
X Increase in withdrawal rate due to customer panic resulting from
downgrade of the Company, falling equity, rising credit spread,
catastrophe insurance loss etc.

X Freezing of capital market resulting into frozen assets for a period
of 3 to 6 months

These stresses are to be incorporated in the appropriate assets or liability
or both in the calculation of measure ratios of liquidity risk.

Liquidity Risk Management
X CRO forum suggests capital injection to manage the liquidity risk as
an ineffective way of managing this risk.
X Investment portfolio at times may not provide liquidity under all the

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