Resources for Basel II Capital Accord (Basel II)

Liquidity Risk Regulations – Establishing the Foundation for Global Collaboration

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Central banks and other regulatory supervisors could ensure a safer financial climate by establishing more thorough requirements regarding capital and liquid assets as a basic way to ensure a safer financial climate. The recent co-ordinated effort to support the global money markets with the injection of $100 billion provides an indication that such an initiative may be considered. In particular, a more extensive endorsement of quantitative instruments for measuring liquidity risk would contribute to market stability. Those are the key conclusions of a White Paper published today by Algorithmics.

The paper notes that within the Basel II framework, liquidity risk appears under Pillar 2 – which means that banks are not subject to a formal capital requirement in connection with their exposure to liquidity risk. And although it is expressly mentioned within the Internal Capital Adequacy Assessment Process, no indication is provided regarding the quantitative methods to be used for measuring the amount of capital to be maintained in connection with liquidity risk exposure.

In addition, there is a lack of harmony amongst regulators and risk management experts regarding the optimal way to handle liquidity risk.

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