Open international capital markets have been instrumental in efficiently allocating risk and allowing firms to fulfill their capital investment demand. Also, systematic and credit risk measures may affect business investment through multiple channels. First, changes in market interest rates imply changes in the cost of capital, which in turn affect investment; the so-called interest channel. Second, changes in market interest rates affect the net cash flow available to a firm.
An objective of the liquidity risk assessment is to see whether a financial institution’s management has put an appropriate control system that can identify, measure, monitor and manage liquidity in place or not. The assessment of liquidity risk to be described in this manual is based on standards prescribed by the Basel Committee on Banking Supervision. As a result, assessor should be assured that a system implemented by a financial institution to identify, measure, monitor and control liquidity risk is appropriate and adequate for its scopes of business and degree of complexity. Large financial institutions with complicated services must have a complex risk management system which can measure all major risk levels while smaller counterparts with fewer services or uncomplicated transactions may be equipped with a risk and management and information system that is far less complicated and requires far fewer resources.
Unsound management and problems with the quality of assets are two fundamental problems which may founder the financial institutions. However, a lack of liquidity due to an inability to load off assets or seek enough cash to continue the operation may also cause financial institutions to stop businesses. Therefore, risk management is extremely important for them.
Deficiencies in the current Regulations have been recognised by both industry and government for a number of years. The delay in a review of the Regulations has been partly due to uncertainty about the extent its scope. There has never been a ‘best time’ to propose change without other factors raising issues that would also impact on the Regulations.
However, with the signing of the agreement between Australia and New Zealand on the joint regulatory scheme for therapeutic products, the impetus to review the Regulations has become more pressing. This is because those dietary supplements that are to be considered and treated as complementary medicines will transfer from the Regulations to provisions under the joint scheme.
