What Principles for Sound Liquidity Risk Management and Supervision requires
Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk. This guidance outlines principles for the sound management of liquidity risk, prompted by market turmoil that re-emphasised the importance of liquidity to the functioning of financial markets and the banking sector. The difficulties highlighted that many banks had failed to take account of a number of basic principles of liquidity risk management, such as having an adequate framework that satisfactorily accounted for the liquidity risks posed by individual products and business lines. Many firms viewed severe and prolonged liquidity disruptions as implausible and did not conduct stress tests that factored in the possibility of market wide strain. This guidance applies to all types of banks, with implementation tailored to the size, nature of business and complexity of a bank’s activities. The core obligation is that a bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. Supervisors should assess the adequacy of both a bank's liquidity risk management framework and its liquidity position and should take prompt action if a bank is deficient in either area.
Pillar: Banking & Global Finance · Authority: Basel Committee on Banking Supervision · Version: 1.0.0 · Last updated:
Primary source: https://www.bis.org/publ/bcbs144.pdf
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Primary Citations — 7 traced to source
- Principle 1: A bank is responsible for the sound management of liquidity risk. A bank should establish a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.
- Principle 3: A bank's board of directors should review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively.
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