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Monday, December 22, 2008

credit card: Liquidity Risk

Liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due,
without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in
funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that
affect the ability to liquidate assets quickly and with minimal loss in value.
Banks use a variety of funding techniques to support credit card portfolios. As such, the techniques individual operations
employ have different implications on liquidity risk. For example, a credit card bank self-funded through securitizations
(see glossary) has different liquidity risk considerations than a credit card bank funded by its retail parent’s commercial
paper. Likewise, multinational banks with access to a full array of funding sources to support credit card operations have
different liquidity risk considerations.
Liquidity risk is present in a bank’s obligation to fund unused credit card commitments. For example, more consumers
use their cards at certain times, such as around gift-giving holidays, so the bank must be aware of seasonal demands.
Liquidity risk is also present if a bank securitizes its credit card portfolio. Credit card portfolios comprised of higher risk
assets and unusual portfolio volatility may be difficult to securitize or sell. Failure to adequately underwrite or collect loans
also may trigger early amortization of a securitization, which could cause liquidity problems. Such an event may also
increase costs or limit access to funding markets in the future.
Banks control liquidity risk through a strong balance sheet management process, a diversified funding base, a
comprehensive liquidity contingency plan, and laddered securitization maturities, if applicable.
To assess liquidity risk, examiners consider:
· The reliability of funding mechanisms.
· The dependence of the credit card operation on securitization of assets.
· The volume of unfunded commitments.
· Attrition of credit card accounts.
· The stability of cobranded and affinity card relationships.
· The ability to fund seasonal demands.

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