Analysis And Comments On The Consultative Document: International Framework For Liquidity Risk Measurement, Standards And Monitoring

Abstract

The market turmoil that began in mid-2007 re-emphasized the importance of liquidity to the functioning of financial markets and the banking sector. In December 2009, the Basel Committee on Banking Supervision (BCBS) of the Bank for International Settlements (BIS) released a consultative document entitled: “International Framework for Liquidity Risk Measurement, Standards and Monitoring”. Interested parties were invited to provide written comments by April 16th 2010. Given our interest in promoting sound liquidity risk management and supervision, three members of the Chair responded to the BIS request. Today, we share with you a summary of our analysis and comments. Our work first supports the adoption  of the BCBS proposals on two new liquidity risk management standards which take the form of a 30-day minimum liquidity coverage ratio (LCR) combined with a one-year minimum net stable funding ratio (NSFR), both to be accompanied by a mandatory set of market-related monitoring tools. Second, we share with you several general comments and suggestions we formulated on the following topics: the need for better coordination, both domestically and internationally between macro and micro-prudential supervision, the need to formulate more precise liquidity risk requirements on foreign currency funding, the importance and usefulness of public financial disclosure, suggestions on extending the use of market-related monitoring rules and metrics. Third, we also share with you more specific comments and suggestions formulated on the following topics : areas of further work like intra-group and cross border liquidity risk management, selling to gauge market liquidity, clarifying LCR and NSFR  definitions, credit rating downgrades, and defining required stable funding categories. Fourth, the results of the analysis support the need to promote a more level business and supervisory playing field for all internationally active banks. Last but not least, we draw the risk-return and financial implications for Canadian banks of the adoption of the BCBS proposals for liquidity risk management and supervision.