By Gudni Adalsteinsson
Liquidity probability is within the highlight of either regulators and administration groups around the banking undefined. the ecu banking regulator has brought and applied a much better liquidity regulatory framework and native regulators have made liquidity a best precedence on their supervisory schedule. Banks have hence suit. Liquidity danger is now a subject largely mentioned in boardrooms as banks try to establish a robust and effective liquidity danger administration framework which, whereas keeping enough assets, doesn't jeopardize the mandatory profitability and go back targets.
The Liquidity probability administration consultant: From coverage to Pitfalls is sensible consultant for banks and hazard execs to proactively deal with liquidity hazard in a systemic way. The publication units out its personal complete framework, along with all of the numerous and important elements of liquidity probability management. The techniques are in accordance with reviews from the new monetary crises, most sensible practices and compliance with present and destiny regulatory specifications, with precise emphasis on Basel III.
Using the recent 6 Step Framework, the publication offers step by step tips for the reader to construct their liquidity administration framework right into a new overarching constitution, which brings all of the varied elements of liquidity probability into one procedure. distinctive consciousness is given to the demanding situations that banks at the moment face whilst adopting and enforcing the Basel III liquidity requisites and counsel is given on how the hot metrics will be built-in into the prevailing framework, offering the main price to the banks rather than being a regulatory reporting matter.
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Extra info for The Liquidity Management Guide: From Policy to Pitfalls
2 Liquidity Risk Having better understood the term liquidity we move to defining liquidity risk. 1 can help. Liquidity risk can be explained diagrammatically as the risk related to the previously mentioned inflows and outflows. A bank can have sources of new liquidity dry up; for instance the bank may not be able to issue new bonds or a lesser amount of new deposits are placed with the bank. On the outflow tap the risk could develop when higher than expected loan growth occurs or higher amounts of deposits are withdrawn than expected.
Any attempt to have a uniform set of minimum liquidity quantum can build up false comfort in the system as it will effectively not be able to take into account the quality and availability of the secondary liquidity. For instance, take a bank with a medium mismatch asset–liability profile but a large proportion of its assets in highly liquid and sellable assets. To require the bank to hold a large buffer when it can easily transform its assets to cash would be the wrong requirement. It could even have the opposite effect, at least when implemented, as the action of one bank to conserve or increase liquidity can collectively have the effect of reducing liquidity in the market as a whole.
All firms have liquidity risk in their operations but banks differ from other corporations in a fundamental way as their idiosyncratic risk can turn into a systemic risk with wider implications, whereas in other sectors a failure of one firm does not necessary impact on another. On the contrary, the failure of a competitor could benefit other firms within the industry. When banks address their liquidity risk it can actually affect other banks in a negative way, again making liquidity risk different from other types of risk.