Global watchdog tightens rules on bank liquidity risks

The Switzerland-based Basel Committee on Banking Supervision has tightened the global standards for liquidity risks of banks to include regular public disclosures of a bank’s liquidity risk profile and management.

The Basel frameworks presently guide most banks globally on risk and liquidity management, which is an indirect offshoot of the 1997 Asian financial crisis.

Basel Committee chairman Nout Wellink said that the goal in developing the global standards is to significantly raise the bar for management and supervision of liquidity risk at banks.

“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,”  said Wellink, who is also the president of Netherlands Bank.

The new standards 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.

Under the enhancements,  supervisors are expected to 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,” Wellink added.