Abstract
At the international level, a wide consensus has emerged over many years on the importance of liquidity monitoring and the need to mitigate the associated risk in order to preserve the stability of individual banks and the soundness of the entire banking system. However, many differences have also emerged regarding how this principle has been transposed into rules or guidelines. Although the changes that have occurred in the international banking system in these last decades have increased the technical solutions available to banks in managing liquidity risk, these changes have also led to an underestimation of the actual exposure to this risk. The crisis has highlighted the need for more efficient liquidity management by banks by involving all governing bodies and corporate management in monitoring and managing liquidity in both normal and stress conditions, integrating better treasury with other functions affecting the liquidity position, and increasing the importance of liquidity risk as a part of risk management. The crisis has also highlighted the weaknesses of self-regulation based on internal models and the need to integrate domestic and international regulations in order to take into account that the search for bank stability and the reduction of competitive inequalities also require defining common rules to limit banks’ appetite for liquidity risk. Liquidity risk is difficult to measure and depends on so many factors that a capital requirement is unsuitable to prevent it. Proper management policy requires examining the liquidity risk as a function of the impact area, the time horizon, the origin and the economic scenario where it occurs. After analysing these four aspects, it is necessary to define models of risk measurement, by identifying indicators to monitor, setting appropriate operating limits and related organisational issues. After reviewing the main economic aspects of liquidity risk, this study examines the new international regulations which will introduce, albeit gradually, a common framework for liquidity risk management in banks, and highlights the main economic and managerial consequences that these regulations will produce for bank management.
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Notes
- 1.
The relation between liquidity and leverage can be found in: Adrian and Shin (2008).
- 2.
Ruozi (2011).
- 3.
Vento and La Ganga (2009).
- 4.
On the relation between liquidity risk and the various subcategories of risk defined by Basel II, see: CEBS (2008), p. 12.
- 5.
Senior Supervisors Group (2009).
- 6.
- 7.
Bruni and Llewellyn (2009).
- 8.
Banks (2005).
- 9.
Murphy (2008).
- 10.
Ruozi (2011).
- 11.
- 12.
The Joint Forum (2006).
- 13.
Banks (2005).
- 14.
- 15.
Deutsche Bundesbank and Bafin (2008).
- 16.
- 17.
Matz and Neu (2007).
- 18.
Murphy (2008).
- 19.
Banque de France (2008).
- 20.
The Joint Forum (2006).
- 21.
Resti and Sironi (2007).
- 22.
Matz and Neu (2007).
- 23.
European Central Bank (2007).
- 24.
Banks (2005).
- 25.
Matz (2007).
- 26.
Resti and Sironi (2007).
- 27.
Bangia et al. (2001).
- 28.
- 29.
Borio (2000).
- 30.
Bervas (2006).
- 31.
- 32.
CEBS (2007).
- 33.
European Central Bank (2007).
- 34.
This refers specifically to “banking groups” since the presence of foreign direct branches, rather than the presence of local companies, is always associated with a centralised model. CEBS (2007).
- 35.
European Central Bank (2007).
- 36.
CGFS (2010).
- 37.
CGFS (2010).
- 38.
Deutsche Bundesbank (2008).
- 39.
Basel Committee on Banking Supervision (1992).
- 40.
Basel Committee on Banking Supervision (2000).
- 41.
The Joint Forum (2006).
- 42.
The ICAAP can be decomposed into the following phases: (1) identification of risks to be evaluated, (2) measurement and evaluation of individual risks and the internal capital needed to meet them, (3) measurement of total internal capital in relation to the totality of risks borne, and (4) determining the total capital and reconciliation with the regulatory capital.
- 43.
Basel Committee on Banking Supervision (2006).
- 44.
Basel Committee on Banking Supervision (2008).
- 45.
- 46.
Nikolaou (2009).
- 47.
Bini Smaghi (2010).
- 48.
Basel Committee on Banking Supervision (2010).
- 49.
The goal is to prevent banks from exploiting double counting: if an asset is included in the stock of high-quality liquid assets, it cannot be computed as a possible source of cash inflows. For this reason, if the collateral is represented by ‘Level 1’ high quality liquid assets, the weighting factor is zero; if it is a ‘Level 2’ asset, the weighting factor is 15 %, and if it is an asset of another type, the factor is 100 %.
- 50.
The total net cash outflows during the 30 calendar days are then calculated as follows:
$$ Total \, net \, cash \, outflows\; = \; outflows - min \, \left\{ {inflows; \, 75\; \% \;of \, outflows} \right\} . $$This means that inflows are subject to an upper limit of 75 % of gross outflows, imposing in this way a requirement for banks to hold a minimum stock of high quality liquid assets at least equal to 25 % of gross outflows.
- 51.
During the implementation of the guidelines agreed by the Basel Committee, there may be differences between individual jurisdictions.
- 52.
Bindseil and Lamoot (2011).
- 53.
Small business customers, consistent with the definition already taken by the regulatory portfolios in Basel II rules, include non-financial small business customers that are managed as retail exposures with an aggregated funding raised from one small business customer that is, even on a consolidated basis, less than one million euros.
- 54.
This prediction requires that Government bonds or similar securities have a 0 % risk weight for credit risk under the Basel II standardised approach.
- 55.
As with the LCR requirement, even in this case, in the implementation phase of the reform, there may be differences in individual jurisdictions.
- 56.
Basel Committee on Banking Supervision (2010).
- 57.
Blundell-Wignall and Atkinson (2010).
- 58.
Resti (2011).
- 59.
Bordeleau and Graham (2010).
- 60.
This weighting factor operates for sovereign bonds or similar securities with a 0 % risk weight for credit risk under the Basel II standardised approach.
- 61.
- 62.
Resti (2011).
- 63.
Basel Committee on Banking Supervision (2011).
- 64.
Bonds issued by banks and financial companies with a maturity longer than 1 year are considered stable assets for 100 % of their value.
- 65.
Sironi (2011).
- 66.
Otker-Robe and Pazarbasioglu (2010).
- 67.
Ruozi and Ferrari (2005).
- 68.
Basel Committee on Banking Supervision (2010).
- 69.
The concept of customer migration, introduced by McKinsey, refers to all those cases of customers who, while not disrupting the relationship with the bank, move the bulk of their purchases to competing banks. These customers, while being “retained”, would create greater losses in certain sectors (including the banking sector) than those resulting from non-retained customers. Coyles and Gokey (2002).
- 70.
Pozsar et al. (2010).
- 71.
FSB (2011a).
- 72.
FSB (2011b).
- 73.
European Commission (2012).
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Ruozi, R., Ferrari, P. (2013). Liquidity Risk Management in Banks: Economic and Regulatory Issues. In: Liquidity Risk Management in Banks. SpringerBriefs in Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-29581-2_1
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