Supervisory Views on Liquidity Regulation, Supervision and Management

Patrick de Neef

Liquidity risk has been around since the first notes and coins were used for trading so many years ago. The risks were simple at that time: if you brought too many coins with you, then you ran the risk of losing them in a robbery, and if you did not bring enough, then you would not be able to have a decent meal that night. The tradeoff was rather clear: you had to estimate how many coins (liquidity) you needed on a certain day to purchase all desired goods. On most days this would be quite predictable, as the same merchant would visit your village every month or so with a steady supply of goods. However, after a bad harvest, accidents, some medieval violence or simply due to pick-up in demand for the goods, the prices may turn out to be higher and you need more cash this month. Being a smart trader, you would bring a second purse, well hidden, with a stock of extra cash just in case you needed more than you expected. While I am pretty sure no one at the time would have called it a liquidity buffer, in my view this is exactly what it is. Even before the time of coins you might have taken your boy with you to the market, so he could run back to the farm to grab an extra chicken in