‘Liquidity a Bigger Challenge Than Capital’

June 04, 2012 /

A major issue during the crisis was banks being unable to roll over short-term financing. Investor confidence plummeted, leading to a liquidity squeeze within some financial institutions.

In response the Basel Committee on Banking Supervision (Basel Committee) introduced two new liquidity ratios for banks. The Basel Committee aims to strengthen banks against adverse shocks; eliminate structural mismatches; and encourage more stable sources of funding.

The paper is particularly relevant for Australian banking institutions and our regulatory environment as it provides valuable information to ADIs preparing for APRA’s final Prudential Standard on Liquidity (APS 210).

Key topics covered include:

The Basel 3 liquidity proposals and implementation timetable
The strategic and operational issues as a result of the ratios
Key actions banks are taking in response
The impact on banks that aren’t able to meet the ratios
How the liquidity ratios are currently being implemented.

The report also contains an illustrative example of the impacts of the new liquidity requirements on a bank’s balance sheet.

 

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