By Roberto Ruozi
The fresh turmoil on monetary markets has made obvious the significance of effective liquidity danger administration for the steadiness of banks. The size and administration of liquidity chance needs to have in mind financial elements equivalent to the influence quarter, the time-frame of the research, the beginning and the commercial situation within which the danger turns into take place. Basel III, between different issues, has brought harmonized foreign minimal specifications and has built international liquidity criteria and supervisory tracking tactics. the fast publication analyses the industrial impression of the recent rules on profitability, on resources composition and enterprise combine, on liabilities constitution and alternative results on banking and monetary products.
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Additional info for Liquidity Risk Management in Banks: Economic and Regulatory Issues
Example text
In order to be included in high-quality liquid assets, instruments should be easily and immediately converted into cash at little or no loss of value and, ideally, be eligible for central banks’ standing facilities. The main features of high-quality liquid assets are: low market and credit risk, ease and certainty of valuation, low correlation with risky assets and listing on a recognized market. These characteristics ensure that they can be converted into cash even in conditions of idiosyncratic and market stress.
4 Liquidity Risk: Regulatory Issues 27 Coherent with such a vision, Basel II has not contemplated liquidity risk within the minimum capital requirements which constitute ‘Pillar one’ of the international accord. It was therefore envisaged, within the internal capital adequacy assessment process known as ‘Pillar two’, that every bank should adopt adequate systems to measure, monitor and control liquidity risk. ‘Pillar two’, known as the supervisory review process, is divided into two phases that integrate each other: • The internal capital adequacy assessment process (or ICAAP), with which banks must make an independent assessment of capital adequacy, present and future, in relation to the risks assumed and to corporate strategy.
5 Economic and Managerial Effects of the New Regulation 43 It is an obvious fact that, within certain limits, more liquid banks can obtain lower risk premiums and benefit from the greater liquidity condition. However, beyond a certain limit, for any bank the benefits of increased liquidity are more than offset by the lower return on assets. 59 In particular, this study comes to prove empirically that banks with more traditional business models—based mainly on the collection of deposits from non-financial customers and on providing loans with the originate-to-hold model—have lower optimal levels of liquidity than banks with non-traditional business models.