The Basel Committee on Banking Supervision issued for public comment enhanced global principles for sound liquidity risk management and supervision.

The draft is a substantial revision of the committee’s liquidity guidance that was published in 2000 reflecting the lessons of the financial market turmoil and supporting one of the key recommendations for strengthening oversight set out in the report of the Financial Stability Forum on enhancing market and institutional resilience. The report was presented to G7 Finance Ministers and Central Bank Governors in April 2008.

“The principles are based on the fundamental premise that a bank’s liquidity risk framework should ensure it maintains sufficient liquidity to withstand a range of stress events, including those that affect secured and unsecured funding,” noted Nigel Jenkinson, co-chairman of the Basel Committee’s working group on liquidity and executive director of the Bank of England.

The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. One standard that the committee is looking to improve is liquidity risk measurement, which includes the capture of off-balance sheet exposures, securitization activities, and other contingent liquidity risks that were not well managed during the financial market turmoil.

The principles also strengthen expectations about the role of supervisors, including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders. 

Comments to the draft are open until July 29. All comments will be published on the Bank for International Settlements’ Web site, unless a commenter specifically requests anonymity.

“The Basel Committee’s goal in developing these global standards is to significantly raise the bar for the management and supervision of liquidity risk at banks” stated Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank. “The Committee fully expects banks and supervisors to implement the enhanced principles promptly and thoroughly. We will vigorously assess the degree to which the principles are implemented.”

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