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Basel III Liquidity Regulation and Its Implications by Janine Mukkudem-Petersen, Mark Petersen

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Chapter 2

Introduction to Basel III Liquidity Regulation

Liquidity involves a bank’s ability to fund assets and honor liabilities without incurring major losses. Because of the maturity transformation of short-term deposits into long-term loans, banks are susceptible to liquidity risk of an idiosyncratic and market-wide nature.1,2

The 2007 to 2009 financial crisis re-emphasized the key role that liquidity plays in the financial and banking sectors.3 Before the crisis, financial markets were bullish and low cost funding was easy to acquire. The reversal in market conditions thereafter led to a reduction in global liquidity for several years. Banks suffered severe pressure that resulted in central banks and regulatory bodies undergirding the operations ...

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