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Basel Committee Chair Discusses Liquidity Risk Management

The Chairman of the Basel Committee, Stefan Ingves, delivered a speech entitled Liquidity risk management – the LCR and beyond. In addition to discussing the Basel III liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), Chairman Ingves reminded banks that “the LCR and NSFR are not meant to be the first line of defence against banks’ liquidity problems.” He observed that “the LCR and NSFR are relatively simple quantitative measures that cannot hope to fully capture the many nuances of liquidity risk that a bank may face” and that “[b]anks must develop a range of quantitative and qualitative controls for themselves to ensure that they are prepared for the volatility in their cash flows that is inherent in the complexity of banks’ business models.” In this context, Chairman Ingves discussed the Basel Committee’s Principles for sound liquidity risk management and supervision and concluded by stating that:

“The first line of defence against the impact of future liquidity shocks on the banking system is stronger risk management by banks themselves. Here, I would encourage the banking industry to devote as much time, if not more, to assessing their implementation of the [Basel Liquidity Risk Management] Principles as they do to measuring and managing their position against the LCR and NSFR. Strong liquidity risk management – in both its quantitative and qualitative dimensions – is undoubtedly critical to long-run success in banking.”

Dodd-Frank Liquidity Risk Management Standards: Pursuant to its enhanced prudential standards authority under the Dodd-Frank Act, the Federal Reserve has established a number of qualitative liquidity risk management standards for large U.S. bank holding companies and for the U.S. operations of large foreign banks, including liquidity risk governance, contingent funding plan, liquidity risk limit, cash flow projection, internal liquidity stress testing and liquidity buffer requirements. Our visual summary of the qualitative liquidity risk management standards for large U.S. bank holding companies is available here. Our visual memorandum and interactive calculator for large foreign banks that are subject to the U.S. liquidity buffer requirement is available here.

Materials:

Stefan Ingves, Chairman of the Basel Committee, Liquidity risk management – the LCR and beyond (May 15, 2014) available here: http://www.bis.org/speeches/sp140515.pdf.

Basel Committee, Principles for sound liquidity risk management and supervision (Sept. 2008) available here: http://www.bis.org/publ/bcbs144.pdf.

 

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