An Introduction to Banking, 2nd Edition

Chapter 10¹LIQUIDITY RISK MANAGEMENT II: BASEL III LIQUIDITY, LIABILITIES STRATEGY, STRESS TESTING, COLLATERAL MANAGEMENT AND THE HQLA

In this chapter we consider an important part of the liquidity risk management process, that of quantifying and reporting liquidity risk exposure as required by the universal “Basel III” rules on bank supervision. We also consider all related ingredients of a best‐practice liquidity risk management framework. This makes Chapter 10 rather a long one, but worth working through as it is possibly the most important in the book!

BASEL III LIQUIDITY METRICS

Strong capital requirements are a necessary condition for banking sector stability but by themselves are not sufficient. A strong liquidity base reinforced through robust supervisory standards is of equal importance. Prior to 2010, there were no internationally harmonised standards in this area. To complement the other elements of its liquidity framework (Principles for Sound Liquidity Risk Management and Supervision and Additional Monitoring Metrics), the Basel Committee developed two minimum liquidity standards:

• The Liquidity Coverage Ratio (LCR): to promote short‐term funding resilience;
• The Net Stable Funding Ratio (NSFR): to provide a sustainable maturity structure of assets and liabilities.

In Europe, a minimum LCR was introduced in October 2015. Implementation of the NSFR, however, is not due until 2018, to give global regulators sufficient time to conduct parallel run exercises to enable ...