Banks can improve the way they measure liquidity risks

The Central Bank of Sweden, Riksbank, has published an Economic Commentary addressed at financial institutions regarding liquidity risk management. The Commentary outlines the shortcomings of the most commonly used tool by banks to monitor liquidity risk in the short term, namely the Liquidity Coverage Ratio or LCR, and presents an alternative metrics that financial institutions may use to better monitor and align intra-period cash in- and outflows.
Specifically, the Commentary points out that the LCR only takes into account the total cash inflows and outflows over a thirty-day time period, but does not take into account daily liquidity needs within this time frame which can lead to shortages within the period despite the fact that the overall LCR shows more than 100%.
Therefore, the authors propose an adjustment of the LCR which is simply calculated as liquidity reserves over total net outflows to add an additional factor to the total net outflows based upon the difference between the total net outflows at the end of the period and the lowest net outflow position WITHIN the period. In other words, total net outflows would be increased or decreased depending upon the intra-period lowest outflow position. That way, so the authors, banks could ensure sufficient liquidity during ANY one day during the period.
As the adjustment is easy to calculate and the model as a whole easy to understand, the authors argue this model to be a significant enhancement to banks‘ liquidity risk management practices.