Chapter 8
BANK LIQUIDITY RISK MANAGEMENT
The Western World’s banking system was – in some jurisdictions at least – on the brink of collapse in September and October 2008, in the wake of the Lehman bankruptcy. Intervention by governments, which in some cases extended to a blanket guarantee of banks’ complete liabilities, prevented this collapse from taking place. In the aftermath of the crisis, national regulators and the Bank for International Settlements (BIS) circulated consultative papers and recommendations that addressed new requirements on bank capital, liquidity and risk management. The UK’s Financial Services Authority (FSA) was perhaps the most demanding; in its Policy Statement 09/16, which was issued in October 2009, it outlined measures on capital treatment, liquidity requirements and stress-testing that implied a fundamental change in the bank’s business model going forward.
In this and the next chapter, we discuss the implications for banks of the new emphasis on risk management by the regulators and the BIS committee – this was the committee that issued the ‘Basel III’ rules in September 2010 for implementation from 2015 onwards. We also provide our own recommendations on how banks can go about meeting these requirements in a way that generates sustained return on capital. This chapter looks at the fundamentals of liquidity risk management, and what its basic principles need to be in the light of current central bank and regulatory requirements. In the following ...
