analyst should look at the health of the current loans, liquidity of all types of assets, and uncertainty of new requests for loans.

- **_Quality of assets and ability to undertake maturity transformation_**<sup>_31_</sup> _._ This is an important factor to consider because the more liquid the assets the bank holds, the less the maturity transformation that is required (less rollover risk), and the less liquidity provision is needed, but the trade off is that most likely the bank’s profitability is also low (very risk averse bank).

- **_Volume and composition of the bank off-balance sheet accounts._** After the credit crisis of 2007-2008, special attention should be given to derivate products, off-balance sheet conduits, structured investment vehicles, guarantees, etc.. Illiquid assets, such as securitized products, imply that the price of the assets varies, reflecting marked to market valuation accounting<sup>_32._</sup> The liquidity risk arises because banks tend not to establish the required liquidity provisions for covering these risks beforehand, relying excessively on the assets liquidation/realization prices to obtain liquidity at a certain point. It is crucial, therefore, that banks monitor and control the volume of their positions on derivatives markets and be conservative regarding their ability to sell illiquid assets at market prices. As mentioned before, there is a ‘collective action problem’ or a ‘fallacy of composition’, in the sense that individual bank actions could result in downward, self-fulfilling, asset price spirals that are very detrimental to all the participants if all banks simultaneously try to liquidate their assets.

Note that both securitizations and off balance sheet activities can either supply or use liquidity, depending on the transaction and the level of interest rates at the time. Legally binding loan commitments and potential higher rates of draw downs of credit facilities - when there is a concern regarding the individual bank or generalized market problems – could prove to be very risky for banks. Liquidity managers should then carefully assess how these activities will affect the bank’s cash flows and liquidity risk on a daily basis, using a stressed scenario where unexpected events could occur.

- **_Concentration_ of deposits or funds**<sup>33</sup> . Funding concentration exists when a single factor can cause a significant and sudden withdrawal of funds. The liability concentration depends on the bank and its balance sheet structure. Concentrations are very credit sensitive, although collateralization may mitigate the sensitivity, depending on the quality and reliability of the collateral. Concentration of funding sources can have a significant impact on liquidity risk, as well as systemic implications for the entire banking system. To monitor concentration, management should review reports of large funds providers and set customer liability concentration caps to help prevent the bank from relying excessively on too few providers or funding sources. It can also define market liability concentration limits by segment (for example, foreign banks, money markets funds), instrument (for example, Fed funds, CDs) and geographic distribution.

> 31 Banque de France, Financial Stability Review “Liquidity Risk Management”, February 2008 32

> Banque de France, Financial Stability Review, “Should financial institutions mark-to-market?”, February 2008 33 OCC, Handbook, page 22