Reconsidering Methods of Curbing Liquidity Risk
From the perspective of individual banks, the liquidity ratio restrictions now being augmented are only meaningful to the extent that they form part of a comprehensive risk management framework that includes a review of the business lines and business continuity plans. Such restrictions should take into account the unique characteristics of individual banks and national financial systems. We should also remember that the liquidation of assets envisioned in these regulations will result in greater uncertainty. To avert systemic risk, these restrictions need to play a mutually complementary role with the policies by central banks and supervisory authorities, eg (1) macro-prudential policies to prevent the accumulation of problem assets and (2) LLR policies and other crisis measures.
