The liquidity link

Liquidity risk management has become a major focus for banks since last year's market turbulence. Despite the widely held view that economic capital should not be directly tied to liquidity risk, Bob Allen argues that banks should take it into account in their economic-capital calculations

In August 2006, Risk - a sister magazine to Asia Risk - published an article in which I argued for the inclusion of liquidity risk as a potentially material contributor to unexpected losses requiring economic capital support.1 This was not a commonly held view at the time. It is worth noting that the article did not advocate a specific additional regulatory capital charge for liquidity risk, but focused on the determination of the appropriate amount of economic capital from a stockholders' value