Liquidity risk management: International framework for standards and monitoring

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The financial crisis exposed the loopholes in existing liquidity risk measurement  and management practices of financial institutions across the globe. As the global financial system emerges from the crisis with liquidity support from central banks, strengthening liquidity management practices is of utmost importance.

To further this end, the Basel Committee for Banking Supervision (BCBS) issued the consultative document on the “International framework for liquidity risk measurement, standards and monitoring.”

Key recommendations of the consultative document are:

  • Increased use of severe stress scenarios to evaluate the balance sheet strength
  • Incorporating liquidity risks, costs and benefits in product pricing and performance measurement
  • Introduction of standard ratios and monitoring tools
  • Increased focus on the asset-liability structure and availability of high-quality liquid assets to cushion against stressed market conditions
  • Comprehensive framework for measuring off-balance sheet and contingent liquidity risks
  • Increased focus on regulatory supervision, monitoring market indicators and information sharing between regulators
  • Enhanced public disclosures about liquidity information

Our report  is aimed at helping Indian banks understand the key points of the document and its potential impact of existing liquidity management practices (pdf, 3.7mb) in India.

The document provides a perspective on:

  • Evolution of liquidity risk management
  • Key features of the proposed framework
  • Current state of liquidity risk management in India
  • Bridging the gap with the proposed framework
  • Key challenges for Indian Banks and the approach towards implementing the framework