Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 49 VIII. LIQUIDITY ADEQUACY 8.1 Introduction Liquidity adequacy is intended to be a separate capital determination from the economic value calculation as described in the introduction of this white paper. It encompasses the right-hand side of the balance beam for capital adequacy discussed in Section 1.1. A company may have sufficient capital adequacy for economic capital but may be inadequate in meeting liquidity demands. Capital adequacy implies a balance of both perspectives. A company must have sufficient capital and liquidity because inadequacy in either will affect financial health. This section specifically addresses the measurement of capital adequacy as it relates to liquidity. We can calculate liquidity adequacy by determining internal funding requirements from all expected internal and external financial resources in meeting cash flow obligations or demands under normal and adverse market conditions taking into account market, credit, operations, and operational contingencies. Figure 18: Framework for Measuring Liquidity Adequacy Sources of liquidity are normally considered to be cash and cash equivalents, expected cash flow from operations (CFO), and credit lines. Obligations or demands on liquidity are defined as fixed payments not covered under cash flow from operations and contingent liquidity. Bank Credit Lines Cash and Cash Equivalents Expected Cash Flow from Operations (CFO) Required Fixed Payments Cash Flow at Risk (CFaR) Trigger Events Sources of Liquidity Fixed Payments Contingent Liquidity Liquidity Adequacy Excess (or Shortfall)