Ingves: Global liquidity regulation, supervision and risk management


The banks perform a fundamental function in the financial system by converting savings into lending. However, this role makes them vulnerable to liquidity risk, something the recent financial crisis reminded us of. Regulation and supervision of banks' liquidity is therefore essential. This was pointed out by the Governor of the Riksbank, Stefan Ingves, when he spoke in his role as Chairman of the Basel Committee on Banking Supervision at a conference organised by the Netherlands central bank (DNB) in Amsterdam, Netherlands, on 15 May 2014.

To increase banks' resilience to liquidity risk the Basel Committee has decided on two new regulations on liquidity; Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The LCR is intended to promote resilience to short-term liquidity shocks and requires a bank's liquidity buffer to be at least as great as the net outflow of cash over 30 days in a stressed scenario. The NSFR is intended to ensure that the banks have a sound funding profile by requiring that the share of long-term, stable funding is greater than the bank's need of stable funding. The LCR is currently being implemented in many parts of the world, while the plan is to introduce the NSFR in 2018.


Mr Ingves noted that the new regulations should help supervisors to assess the banks' liquidity risks as well as giving market participants a clear benchmark when assessing them. The liquidity regulations are supplemented by the Basel Committee's Principles for Sound Liquidity Risk Management and Supervision. These constitute a number of principles for good management and supervision of liquidity risk in banks, which should also contribute to increasing the banks' resilience.

Finally, Mr Ingves emphasised that sound management of liquidity risk is unquestionably of critical importance for the banks' long-run success, but that the primary responsibility ultimately lies with the banks themselves. Not with regulators and supervisors.


Read the whole speech via the link.

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