BIS publishes report on liquidity risk

The BIS Working Group on Liquidity report evaluates how the subprime crisis had affected liquidity risk at financial institutions.

The Bank for International Settlements’(BIS)Basel Committee on Banking Supervision (BCBS) has published a report that summarises the main findings from the Working Group on Liquidity (WGL). The group was founded by the BCBS in December 2006 to review liquidity risk supervision practices in member countries in response to the market volatility in summer 2007, and was also given a mandate to evaluate how these developments had affected liquidity risk at financial institutions.

The report, “Liquidity Risk: Management and Supervisory Challenges”, highlights financial market developments that affect liquidity risk management, discusses national supervisory regimes and their components, outlines initial observations from the current period of stress and details the future work of the WGL.

"The extreme liquidity conditions of last summer and resulting difficulties that persist today are vivid illustrations of the critical importance of market liquidity to the banking sector," said Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank. "These events emphasised the links between market and funding liquidity, the interrelationship between funding liquidity risk and credit risk, and the fact that liquidity is a key determinant of banking sector soundness."

The Working Group is currently conducting a fundamental review of the BCBS’s “Sound Practices for Managing Liquidity Risk in Banking Organizations”, published in 2000. Drawing from recent and ongoing work on liquidity risk by the public and private sectors, the BCBS aims to enhance these sound practices to strengthen banks' liquidity risk management and improve global supervisory practices, which will be issued for public comment this summer.