Liquidity Crisis Management

A firm operating under normal market circumstances will be able to rely on its mandate, policies, and limits to control the liquidity exposures inherent in its business. If these mechanisms are structured properly and followed diligently, the financial impact of the exposures should remain manageable. However, there may still be instances when endogenous or exogenous factors overwhelm the firm, giving rise to the possibility of greater financial problems and even instances of financial distress. In such extraordinary cases a firm must immediately implement a liquidity crisis management program. A successful program allows a company to move beyond the crisis stage and normalize its operations at a minimum of cost; an unsuccessful program — or indeed the lack of any program at all — can lead to complications, including liquidity spirals and insolvency. In this chapter we consider the scope and focus of liquidity crisis management, ex ante market access, defensive measures, communications, trigger events, disaster recovery, and plan testing.