Systemic Decision Making for Liquidity Risk Management in Banks

The outbreak of the recent financial crisis reveals significant problems in current bank practices in conventional liquidity risk management. To avoid catastrophic consequences, a holistic view, which captures the dynamic interactions between liquidity and other financial variables, should be taken to help banks make business decisions. However, few studies in the literature have addressed this problem. To fill the research gap, we present a Systemic decision making approach for Liquidity Risk Management (SLRM) as a more advanced alternative to Conventional Liquidity Risk Management (CLRM) by capturing dynamic factors, offering logic visibility, and considering rare but fatal events. We show that SLRM can be used to support managerial decisions in developing contingency plans for liquidity management. SLRM is validated by using real data from Washington Mutual, a US bank failed during the 2008 financial tsunami. Further, we demonstrate that SLRM can also help banks conform to regulatory changes in Basel III.