LO 72.e: Discuss the impact of available asset transactions on cash flows and liquidity generation capacity
🧠 Why Asset Management Isn’t Just for Retirement Planners
Managing a bank’s assets for liquidity isn’t about making your portfolio look pretty on paper. It’s more like keeping your kitchen stocked with food: you want groceries $($assets$)$ that are still usable when you need to cook $($generate cash$)$. That’s where the Term Structure of Available Assets $($TSAA$)$ comes in—a kind of pantry inventory for liquidity planning.
TSAA tells you what assets are in your possession $($not just ownership, but physical control$)$ and how much of them can be quickly turned into cash or pledged as collateral. So if you’re hoarding chocolate, but it’s locked in your neighbor’s cupboard, it’s no good to you in a hunger crisis.
🧮 TSAA in Formula Form
For a single asset $A^1$, tracked over time from $t_0$ to $t_b$:
$TSAA^{A^1}(t_0,t_b) = \{A^P_1(t_0), A^P_1(t_1),…, A^P_1(t_b)$
Explanation:
- $TSAA^{A^1}(t_0,t_b)$ = Term structure of available asset $A^1$ over the time horizon from $t_0$ to $t_b$.
- $A^P_1(t_i)$ = Quantity of asset $A^1$ possessed at time $t_i$.
For a full set of $M$ assets:
$TSAA(t_0,t_b) = \left\{\sum_{m=1}^{M} A^P_m(t_0), \sum_{m=1}^{M} A^P_m(t_1),…, \sum_{m=1}^{M} A^P_m(t_b)\right\}$
Explanation:
- $M$ = Number of different available assets.
- $A^P_m(t_i)$ = Quantity of asset $m$ possessed at time $t_i$.
- The sum gives the total available quantity across all assets at each point in time.
📈 How Do Transactions Impact TSAA and Liquidity?
Imagine you’re playing Monopoly, and someone trades you a hotel $($asset$)$. Whether you gain rent $($cash flows$)$ depends not just on owning it, but whether you have control to place it on the board. Similarly, possession—not just ownership—drives TSAA.
Let’s break it down by transaction type:
🔼 Increases in TSAA:
- Reverse Repo: You lend cash, get the asset. You don’t own it, but you can use it—like borrowing your friend’s tux for prom. TSAA up, no immediate TSLGC unless you repo it yourself.
- Buy/Sellback: You buy and will sell later. You own and possess the asset. TSAA up, TSECF/TSECCF include future cash flows.
- Security Borrowing: You get the asset, no cash paid. TSAA up, even though you don’t get the coupons. It’s like borrowing an umbrella—you can use it, but not sell it.
🔽 Decreases in TSAA:
- Repo: You give up asset possession in exchange for cash. TSAA down, but TSLGC benefits short-term.
- Sell/Buyback: You sell now, buy back later. TSAA down, TSLGC goes up with initial cash received.
- Security Lending: Asset leaves your vault. TSAA down, but you get a fee at contract’s end. Like renting your tux to someone else.
💧 What About the Rainy Days? Impact on TSECF and TSLGC
TSECF $($Term Structure of Expected Cash Flows$)$ reflects all known inflows/outflows. If you hold the asset, you include coupons and final redemption. If you lend it away, those goodies are gone—no free lunch!
TSLGC $($Liquidity Generation Capacity$)$, on the other hand, reflects how much juice you can squeeze from lemons in your asset fridge. Selling assets or repoing them provides real-time hydration, i.e., liquidity.
🧪 Example? Bond It Like Beckham!
Let’s say a bank purchases a bond:
- Purchase = cash outflow $→$ TSAA up, TSECF/TSECCF reflect initial outflow and later coupon inflows.
- Coupon payment = TSAA unchanged, TSECF up.
- Sell half = TSAA down, TSECF/TSECCF reduced, TSLGC gets a boost from the cash sale.
- Repo the rest = TSAA down, cash received $→$ TSLGC up.
When repo ends, TSAA returns and TSLGC resets. It’s like renting your car on ZoomCar—you lose access short-term, gain cash, and get the car back later.
📊 Summary Table $($from Figure 72.2 in text$)$
| Transaction Type | TSAA Impact | TSLGC Impact | TSECF/TSECCF Impact |
|---|---|---|---|
| Asset Purchase | Yes ↑ | No | Yes ↓↑ |
| Repo | Yes ↓ | Yes ↑↓ | No |
| Reverse Repo | Yes ↑ | No | Yes ↓↑ |
| Security Lending | Yes ↓ | No | Yes ↑ |
| Security Borrowing | Yes ↑ | No | Yes ↓ |
🔁 So… What’s Next?
Now that we understand TSAA and its dynamic with TSLCGC and TSECF/TSECCF, the next question is:
👉 How do banks prepare for the unexpected—like sudden liquidity needs or random market shocks?
That takes us to the exciting world of Term Structure of Liquidity-at-Risk $($TSLaR$)$ and cash flow modeling at confidence levels… Let’s dive into risk next!