Banking regulators move to tackle liquidity risk

Banking regulators move to tackle liquidity risk

The Basel Committee on Banking Supervision has issued new draft guidelines for the management and supervision of liquidity risk, aimed at making the global banking system more resilient and addressing weaknesses revealed by the credit crunch.

The Committee - which is part of the Bank for International Settlements (BIS) - said in April that it would publish for consultation a new set of "global sound practice standards" for liquidity risk management after the credit crisis "revealed significant risk management weaknesses at banking institutions".

The new draft principles represent a substantial revision of the Committee's liquidity guidance published in 2000 and reflect lessons learned from the financial market turmoil.

The primary objective of the new guidance is to raise banks' resilience to liquidity stress. Among the measures put forward are the need for "governance and the articulation of a firm-wide liquidity risk tolerance" and more effective liquidity risk measurements, including the capture of off-balance sheet exposures and "other contingent liquidity risks that were not well managed during the financial market turmoil".

The need for banks to improve liquidity cushions and for regular public disclosures of a bank's liquidity risk profile are also highlighted, along with the need for stress tests that cover a "variety of institution-specific and market-wide scenarios" and are linked to the development of contingency funding plans.

The principles also aim to boost the role and expectations of supervisors, including the need for timely intervention to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders.�

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, warns that he expects banks and supervisors to implement the enhanced principles "promptly and thoroughly".

"We will vigorously assess the degree to which the principles are implemented," says Wellink.

The group is inviting comments on its draft guidelines by 29 July.

You can read the Committee's proposals here:

Download the document now 193.4 kb (PDF File)

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