Banks in currency board systems and limit on minimum liquidity position in national currency

Banks in countries with currency board arrangements are exposed to the risk of illiquidity in their national currency, which is driven by currency board stability. In line with liquidity risk appetite, banks need to restrict their own risk exposure with a limit on minimum liquidity position in the national currency. This paper presents mathematical derivations of a limit on minimum liquidity position in the national currency, which depends on the business environment and on the currency structure of the balance sheet. Algebraic calculation in this paper is of particular interest to banks, which do business in countries with currency board arrangements.