MacroVar monitors liquidity risk by monitoring the LIBOR-OIS spread dynamics. Liquidity risk is one of the components of MacroVar Risk Management model. Learn more about how MacroVar risk management model monitors liquidity risk.
Liquidity risk model
Liquidity risk: Liquidity risk is the risk that credit becomes unavailable, or is offered only on more stringest terms in the global financial market. Liquidity dry ups lead to systemic crises causing economic recessions and elevated financial risk.
MacroVar monitors the liquidity crisis by analyzing the LIBOR-OIS spread.
The Libor-OIS spread is the difference between LIBOR - the floating rate at which banks lend to each other for short-term unsecured loans and overnight index swap rates which are set by central banks.
Since LIBOR reflects bank credit risk, and OIS is risk-free, a significant rise in the LIBOR-OIS spread signals rising bank credit risk and liquidity risk.
During the subprime crisis for example, banks desire to keep ample cash balances, and their reluctance to lend to other banks, led to an unusual widening of the LIBOR-OIS spread which signaled global liquidity drie upa and predicted the upcoming global financial and economic crisis.