To Assess Banking Liquidity Risk by Emery's Lambda

Bankers should analyze solvency for liquidity management, with regard to their financial situation, in specific periods of time. So, a special process should be designed for assessing and supervising cash balances. Emery’s Lambda is an easy to use model based on winner process and is suitable for cash sufficiency analysis. The purpose of this paper is to apply Emery’s Lambda for approximation of liquidity risk and to find the best situation for correct cash forecasting by this model. The study has been done by data gathered from a branch of Bank Melli Iran. Cash balance at the beginning of the day, mean and standard deviation of cash flows in a specific horizon of time are used for Lambda calculation and determination of cumulative probability distribution. The results show that with the past 3 and 4 days, 4 and 5 next day liquidity risk can be calculated with confidence coefficient of 100a% and Lambda should be 2.4 to 2.6. So, if Lambda would be lesser than 2.4 with the past 3 or 4 d ys data, cash inadequacy can be occurred during 4 or 5 days later.