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Monitoring Tools for Basel III

One of the advantage of the financial crisis is that banking regulators focus more on liquidity then capital. Hence Basel Committee's focussed in Basel III to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. It gives the birth of introducing new monitoring tools for liquidity risk. The main purpose of them was to have sufficient short-term liquidity reserves for protection during liquidity squeeze; and to pursue aggressive strategies in growth periods that skew the bank's funding structure in favor of more short-term funding.

Currently regulators are still not 100% sure if the monitoring tools which they had specified in Base III is enough to monitor liquidity for the financial institution. I thought it will be good to know what they are as of now:

Basel III introduces new ratios to serve as preventative monitoring tools for liquidity risk.
1. Maturity Profile - It helps to compare liquidity risk profiles across institutions. Also, it will highlight to banks and supervisors when potential liquidity needs could arise. They are generally of 2 types: Contractual & Business-as-Usual Maturity Profile

2. Concentration of funding – We can assists supervisors in assessing the extent to which liquidity risks could occur in the event that one or more of the funding sources are withdrawn (e.g. select counterparties, instruments and currencies).

3. Available unencumbered assets – It provides a view into the potential capacity to raise additional secured funds. Also stressed environment may significantly impact the value of the collateral.

4. LCR by currency – Under this we assess LCR in each significant currency which allows monitoring and management of the overall level and trend of currency exposure at a bank.

5. Market–related monitoring – Here data is to monitor includes market-wide data on asset prices and liquidity, institution-related information such as credit default swap spreads, equity prices and the institution's ability to fund itself in various wholesale funding markets and the price at which it can do so.

Hopefully once these monitoring tools will be placed bank can evaluate the potential effect of the bank's liquidity strategy on a quarter-by-quarter basis. Also providing them of the likelihood when they would run out of cash in given scenarios and thus helping them to come out with contingency plans quicker before another financial crisis. 


Disclosure : I wrote this article myself and it express my own opinion


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Amit Agrawal

Amit Agrawal


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13 Mar 2010



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