Sound Practices for Managing Liquidity in Banking Organisations
by Basel Committee for Banking Supervision of the Bank for International Settlements
Abstract: Please find attached a paper issued today by the Basel Committee on Banking Supervision that outlines a set of sound practices for managing liquidity in banking organisations. This paper forms part of an ongoing effort by the Committee to strengthen procedures for risk management in banks. The Committee believes that liquidity - the ability to fund increases in assets and meet obligations as they become due - is crucial to the ongoing viability of any banking organisation. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organisation can have systemic repercussions. The management of liquidity is therefore among the most important activities conducted at banks.
Over time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. In light of these developments, the Committee is replacing the existing 1992 paper on liquidity - A framework for measuring and managing liquidity - with updated guidance. The paper is organised around a set of 14 principles falling in the following key areas:
- Developing a structure for managing liquidity
- Measuring and monitoring net funding requirements
- Managing market access
- Contingency planning
- Foreign currency liquidity management
- Internal controls for liquidity risk management
- Role of public disclosure in improving liquidity
- Role of supervisors
The paper is not being issued formally for consultation, but if you have strong views our Risk Management Group would be pleased to receive them.
Download paper (119K PDF) 27 pages
Related reading: Credit Risk Models at Major U.S. Banking Institutions: Current state of the art and implications for assessments of capital adequacy