Many banks and credit unions satisfy their liquidity risk modeling through their ALM reporting accompanied by traditional (historical) liquidity ratios. Although ALM models may produce some ancillary liquidity reports, the underlying assumptions between ALM (interest rate) scenarios may differ greatly from that of a liquidity scenario. For example, a typical ALM interest rate scenario may be that rates rise 200bp over the next year. A typical liquidity scenario may be that credit deteriorations impair capital levels, and thus curtail unsecured borrowings. Therefore, it is difficult for financial institutions to model interest rate risk along side liquidity risk, in the same scenario.
In response, financial institutions have developed internal spreadsheet models to address the specific nature of liquidity risk. The issue however, is that these internal spreadsheets are now considered models based upon regulatory definition of a model, and therefore fall under the model risk management requirements, in part requiring a validation. We have particular experience in liquidity model risk and can work with you to validate your liquidity model.