Basel Committee drafts liquidity risk principles

“The Basel Committee’s goal in developing these global standards is to significantly raise the bar for the management and supervision of liquidity risk at banks,” said Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank. “The committee fully expects banks and supervisors to implement the enhanced principles promptly and thoroughly. We will vigorously assess the degree to which the principles are implemented.”

The principles support one of the key recommendations for strengthening prudential oversight set out in the Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience, presented to G-7 finance ministers and central bank governors in April.

The draft principles represent a substantial revision of the committee’s liquidity guidance published in 2000, reflecting the need to address critical areas of weakness that have emerged in the financial markets since the second half of 2007. The work was drawn from recent and ongoing work on liquidity risk by the public and private sectors, and is intended to strengthen banks’ liquidity risk management and improve global supervisory practices.

“The principles are based on the fundamental premise that a bank’s liquidity risk framework should ensure it maintains sufficient liquidity to withstand a range of stress events, including those that affect secured and unsecured funding” said Nigel Jenkinson, co-chairman of the Basel Committee’s working group on liquidity and executive director of the Bank of England.

The principles also strengthen expectations about the role of supervisors. Arthur Angulo, the other co-chairman of the working group and senior vice-president of the Federal Reserve Bank of New York, added: “Supervisors, for their part, should assess the adequacy of both a bank’s liquidity risk management framework and its liquidity position. In order to protect depositors and to limit potential damage to the financial system, supervisors should take prompt action if a bank is deficient in either area.”

The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. The primary objective of this guidance is to raise banks’ resilience to liquidity stress.