Ebook Liquidity Risk Management in Financial Institutions Following the Global Financial Crisis
In the turmoil in global financial markets and financial crisis after the summer of 2007, several overseas financial institutions failed. The financial institutions were forced to fail because liquidity became tight despite the fact that those institutions had maintained a sufficient regulatory capital adequacy ratio. Moreover, some financial institutions located here in Japan, including foreign financial institutions, faced funding difficulties at home and abroad and were forced to reduce the size of balance sheets. Through such experiences, the importance of liquidity risk management has been recognized again. Namely, it is critically important for financial institutions to have both a sufficient capital base and an appropriate liquidity risk management system in order to ensure the soundness of management and thereby exert the stable financial intermediation function.
Against such a backdrop, central banks and the regulatory and supervisory authorities have been strengthening monitoring financial institutions' liquidity risk management. In addition, the review of the framework for financial regulation and supervision is underway. For example, the Basel Committee on Banking Supervision (hereafter the Basel Committee) presented in December 2009 a proposal on new capital adequacy requirements and also proposed the introduction of liquidity regulations. The Committee plans to finalize specific requirements after the process of public consultation and impact assessment.
In highly globalized financial markets, liquidity risk could immediately spread once it manifested itself and might induce a global liquidity crisis. Given such characteristics of liquidity risk, financial institutions need to strive constantly to improve liquidity risk management. The financial authorities need to encourage financial institutions to steadily pursue such efforts in order to preempt a future financial crisis.
As the central bank of Japan, the Bank of Japan has been monitoring the liquidity conditions of financial institutions on a daily basis, and providing advice and guidance as necessary. The Bank's framework for liquidity monitoring was introduced in detail in "The Bank of Japan's Approach to Liquidity Risk Management in Financial Institutions" issued in June 2009 (hereafter June 2009 paper). The Bank's measure has a characteristic of encouraging improvement in liquidity risk management flexibly and in a fine-tuned manner through a daily dialogue with each individual financial institution. Such liquidity monitoring, advice, and guidance by the Bank, together with the efforts to improve risk management by financial institutions themselves, appear to have contributed significantly to enabling Japan's financial system to avoid a deep crisis on the liquidity front. The recent financial crisis has, however, revealed that there are remaining challenges in liquidity risk management in financial institutions located in Japan.
Based on the June 2009 paper, this paper takes into account the experience of the recent global financial crisis and international discussions, and aims at encouraging further improvement in financial institutions' liquidity risk management. In the following, the methods the Bank uses in monitoring financial institutions' liquidity risk are first summarized. Then the paper reviews the responses by financial institutions located in Japan to liquidity risk during the recent financial crisis, and refers to the challenges that have been highlighted from such experiences. Finally, also reflecting such challenges, the paper shows the items that the Bank will focus in checking financial institutions' liquidity risk management from now on. Those items are derived from adding several new items to those illustrated in the June 2009 paper.
Download
PDF Ebook Liquidity Risk Management in Financial Institutions Following the Global Financial Crisis
Posted in :
