Global bank supervisors endorse sound practice standards for liquidity risk

The Basel Committee’s Principles for Sound Liquidity Risk Management and Supervision was endorsed by central bankers at an international conference

BRUSSELS – Bank supervisors from central banks and supervisory agencies have endorsed the Basel Committee's Principles for Sound Liquidity Risk Management and Supervision. Supervisors were meeting at the International Conference of Banking Supervisors hosted by the Belgian Banking, Finance and Insurance Commission and the National Bank of Belgium on September 24–25, 2008 in Brussels.

The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. Key elements of a bank's governance of its liquidity risk management are also emphasised. The document also sets out the principles to strengthen the measurement and management of their liquidity risk. Among other things, a bank should conduct regular stress tests for a variety of short-term and protracted institution-specific and market-wide stress scenarios and use the outcomes to develop robust and operational contingency funding plans; ensure the alignment of risk-taking incentives of individual business lines with the liquidity risk exposures the activities create; actively manage its intra-day liquidity positions and risks to meet payment and settlement obligations; and maintain a cushion of unencumbered, high-quality liquid assets as insurance against a range of stress scenarios.

Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, stated that: “The new liquidity principles should help promote better risk management in this key area. This will only be achieved, however, if there is robust and timely implementation by banks and supervisors. The Committee will co-ordinate rigorous follow-up by supervisors to ensure banks adhere to these fundamental principles."

The principles also discuss the key role of regular public disclosure that enables market participants to make an informed judgement about the soundness of a bank's liquidity risk management framework and liquidity position. The role of supervisors is also highlighted, including the responsibility to intervene to require effective and timely remedial action by a bank to address liquidity risk management deficiencies. The principles also stress the need for regular communication with other supervisors and public authorities, both within and across national borders.