According to the Bank for International Settlements, and liquidity is the bank's ability to fund increases in assets and meet obligations as they fall due, without incurring unacceptable losses. Bank term refers generally to banks and banking holding companies or other companies through banks supervisors to be the parent of the banking group under the national law applicable as determined to be appropriate national supervisor of the facility considered.
The fundamental role of banks in converting short-term maturity deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both from the nature of private institutions and those that affect the markets as a whole.
almost every financial transaction or commitment has implications for liquidity in the bank. Help effective management of liquidity to ensure the bank's ability to meet its obligations and cash flows, which is the risk is uncertain because it is affected by external events and conduct other factors.
Liquidity risk management is of paramount importance because the lack of liquidity in a single institution can have system-wide repercussions. Developments in financial markets have increased in the past decade, the complexity of liquidity risk management.
and the market turmoil that began in mid-07, reaffirmed the importance of liquidity to the functioning of financial markets and the banking sector. Early in the turmoil, the most promising asset markets and it was readily available financing at low cost.
reversal in market conditions is unclear how the speed of liquidity can evaporate and that liquidity can last for a long period of time. The banking system came under intense pressure, prompting central bank intervention to support the work of all the financial markets, and in a few cases, individual institutions.
, many banks have failed to take into account a number of basic principles of liquidity risk management when liquidity was abundant. Not many of the most vulnerable banks do not have the appropriate framework, dominating in a satisfactory manner to liquidity risk posed by individual products and lines of business, and therefore the level of incentives on the business and misaligned with the overall risk of the bank's tolerance.
, many banks have not considered the amount of liquidity they might need to satisfy contingent obligations, whether contractual or non-contractual, as they see the funding of these obligations to be highly unlikely.
many companies look sharp and prolonged liquidity disruptions implausible not been stress tests that are taken into account the possibility of market wide strain or the severity or a break.
contingency funding plans (CFPs) were not always appropriately linked to stress
test results, and sometimes fails to take into account the potential closure of some funding
sources.
in order to account for developments in the financial market as well as lessons learned from the crisis, the Basel Committee conducted a fundamental review of the 00 sound practices for managing liquidity in the banking institutions. It has been expanded guidance significantly in a number of key areas.
, in particular, are available more detailed guidance on:
1. The importance of establishing a tolerance of liquidity risk
2. Maintain an adequate level of liquidity, including through a cushion of liquid assets .
3. The need to allocate liquidity costs, benefits and risks to all significant business activities.
4. Identify and measure the full extent of the liquidity risk, including the risk of emergency liquidity.
5. The design and use of severe stress test scenarios.
6. The need for a strong and practical contingency funding plan.
7. manage daily liquidity and collateral risk. And
8. public disclosure in promoting market discipline.
guidance for supervisors also been substantially increased proportion. The directive stresses the importance of supervisors assessing the adequacy of the framework of liquidity risk management at the bank and the level of liquidity, and refers to the steps that should be considered supervisors if this is not enough.
confirmsprinciples also on the importance of effective cooperation between supervisors and other key stakeholders, such as central banks, especially in times of stress.
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