Liquidity Risk Management (LRM) has become increasingly vital in the banking industry, especially with the recent financial meltdown and economic down-turn. During the crisis, increasing credit concerns and feeble market liquidity animated a cycle of deteriorating asset market values and deleveraging. Authorities around the world sort for a solution as inter-bank lending came to a halt, credit risk and capital flight became common-place, and banks were on their knees in search of liquidity.
Many financial institutions were bailed-out or restructured. The inability of a bank to meet up with its financial obligation/liability is a premise on which crisis may result. This issue may be due to deterioration in asset quality or general loss of confidence in the financial institution due to circumstances more or less related to the bank in question.
It therefore becomes imperial for banks to develop policies and standards that best measure and manage their liquidity positions on an on-going basis. More so, it is also necessary to project funding liquidity issues that could crop-up during a crisis event (stress testing and scenario analyses). In this paper we attempt to piece together standard practices of bank LRM, while keeping a close on ‘Basel II pillar 3’ disclosure criteria. The reason we look up to Basel principles is, in February 2008, the Basel Committee on Banking Supervision published ‘Liquidity Risk Management and Supervisory Challenges’ which somewhat predicted the financial crisis.
The report emphasized that banks had failed to take account of a number of fundamental principles of LRM. It further stressed many financial institutions did not conduct stress tests and scenario analyses because they did not consider severe and prolonged liquidity disruptions as very likely. The ensuing financial meltdown justified and gave much credit to this report. It is therefore our goal to investigate what post-crisis disclosure measures have been taken into account by top world banks. Findings shall be relevant to bank stakeholders as well as policy makers.
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Post-Crisis Bank Liquidity Risk Management Disclosure
