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Liquidity Risk - Relevance to Actuaries [9]

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Bullet points include: Leverage magnifies upside and downside. Return potentials in some product areas may be inadequate without leverage. Leverage seems to be linked to increased risk of fat tails, i.e. extreme events. Leverage introduces risks not previously present, because of need to fund borrowing implicit in the leverage, e.g.: Liquidity risk – entity lending to fund/structure may in future be unwilling tor unable to continue to support the leverage, or only willing at a much higher price, Forced unwind risk – funding arrangements may require automatic unwind of structure in adverse circumstances, locking in (very) poor returns to investors, Variable borrow cost risk – market rates for the borrowing may rise unexpectedly

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