The Basel Committee on Banking Supervision released a paper today entitled Liquidity Risk: Management and Supervisory Challenges .
The Basel Committee's Working Group on Liquidity began work on this topic in late 2006 to review liquidity risk supervision practices in member countries. In response to the financial market turmoil that began in mid-2007, the Working Group's mandate was expanded to evaluate how these developments had affected liquidity risk at financial institutions.
In view of the relevance of the Working Group's review, the Basel Committee is publishing the key findings. The paper highlights financial market developments that affect liquidity risk management, discusses national supervisory regimes and their components, and outlines 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 Basel Committee and President of the Netherlands Bank. "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."
The Working Group is currently conducting a fundamental review of the Basel Committee's Sound practices for managing liquidity risk in banking organisations published in 2000. Drawing from recent and ongoing work on liquidity risk by the public and private sectors, the Basel Committee aims to enhance these sound practices to strengthen banks' liquidity risk management and improve global supervisory practices. The Basel Committee plans to issue the revised sound practices for public comment this summer.