Resources for Basel II Capital Accord (Basel II)

Basel II – BIS seeks to strengthen liquidity risk management

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On Friday, the Basel Committee on Banking Supervision’s Working Group on Liquidity released a paper entitled “Liquidity Risk: Management and Supervisory Challenges”. In view of the relevance of the Working Group's review, the Basel Committee is publishing the key findings now. These highlight financial market developments that affect liquidity risk management, discuss national supervisory regimes and their components, and outline initial observations from the current period of stress.

"The extreme liquidity conditions of last summer and resulting difficulties that persist today are vivid illustrations of the critical importance of market liquidity to the banking sector," stated Nout Wellink, Chairman of the BCBS. "These events emphasised the links between market and funding liquidity, the interrelationship between funding liquidity risk and credit risk, and the fact that liquidity is a key determinant of banking sector soundness."

Last October, we reported that the BCBS said that the implementation of the Basel II capital framework would have gone some distance to alleviate the global credit crunch which had resulted from the sub-prime lending crisis. Wellink then said that Basel II was designed to combat liquidity risk and would have improved the robustness of valuation practices and market transparency for complex and less liquid products. This met with an amount of surprise from many industry participants. Liquidity risk is only specifically mentioned three times in Basel II and only in general terms such as saying it was crucial, of concern and that banks should have systems for measuring, monitoring and controlling it.

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