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June 28, 2008
BIS Seeks Input on Proposed Guidelines on "Principles for Sound Liquidity Risk Management and Supervision"
On June 17, the BIS issued a draft paper on "Principles for Sound Liquidity Risk Management and Supervision." This paper will be adopted as guidance for all banks supervised by the Basel Committee on Banking Supervision (BCBS).
As DC SC member Tom Day discussed last week, (A Discussion of Current Issues in Risk Management: PRMIA DC Chapter Meeting & Open Forum) this proposed guidance replaces the 2000 BIS paper on liquidity and should be the focus of attention for all banks affected.
I shall ask the BIS the two basic questions raised during the discussion by the DC chapter, namely:
1) Is risk management specific to aggregate liquidity even possible?
2) Is not the fact of a large, deliberately ineffecient OTC market structure the root of concerns regarding liquidity?
Says the BIS press release: "The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas:
* Governance and the articulation of a firm-wide liquidity risk tolerance;
* Liquidity risk measurement, including the capture of off-balance sheet exposures, securitisation activities, and other contingent liquidity risks that were not well managed during the financial market turmoil;
* Aligning the risk-taking incentives of individual business units with the liquidity risk exposures their activities create for the bank;
* Stress tests that cover a variety of institution-specific and market-wide scenarios, with a link to the development of effective contingency funding plans;
* Strong management of intraday liquidity risks and collateral positions;
* Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress; and
* Regular public disclosures, both quantitative and qualitative, of a bank's liquidity risk profile and management.
The principles also strengthen expectations about the role of supervisors, including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders."
These guidelines are among the most prescriptive and specific ever proposed by the BIS. PRMIA members employed by banks in the countries that participate in the BCBS process should be considering comments on this paper.
Chris
Posted by whalenc at June 28, 2008 07:40 AM
