The New Framework for Liquidity Risk

Gianluca Trevisan

This article was first published as a chapter in Basel III and Beyond, by Risk Books.

8.1 Introduction

Liquidity risk management has become a fast-evolving discipline. The reassessment of management practices and techniques to identify, measure and monitor this risk is strictly intertwined with the regulatory reform introduced by the Basel Committee under the political input of G20 leaders and the high-level commitment of the Financial Stability Board (FSB). This chapter will discuss the new regulations as they relate to liquidity risk.

Liquidity risk can be defined as “the ability to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses” (BCBS 2008a). It generally manifests itself in the form of a failure to meet payment obligations, which may be caused by an inability to raise the necessary funds (funding liquidity risk) or the existence of limitations on the liquidation of assets (market liquidity risk). Liquidity risk also includes the risk of having to meet payment obligations at non-market costs, ie, incurring high funding costs or (and sometimes at the same time as) capital losses where assets have to be liquidated.


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