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Liquidity Risk - The Sharp End Issue of the Credit Crunch in 2008

Liquidity Risk is a confused topic (from a supervisory or B2 perspective)

because it has not been clear whether this is a risk type to be treated qualitatively or quantitatively through the development of the Basel II (B2) accords. In the initial months after the first Basel Accords were published most European regulators discussed the challenge of Liquidity Risk in qualitative terms. Latterly however the emphasis has been on the need for regulated financial institutions (FI) to stress test this aspect of Market Risk. This stress testing requirement demands that Liquidity Risk be treated quantitatively, from the perspective of a methodological approach to capturing how the FI’s exposure to this risk may fluctuate under extreme conditions.

Basel III liquidity standard and strategy for assessing implementation of standards

The GHOS endorsed the Committee's comprehensive approach to monitoring and reviewing implementation of the Basel regulatory framework. GHOS Chairman and Governor of the Bank of England Mervyn King noted that "the focus on implementation represents a significant new direction for the Basel Committee. The level of scrutiny and transparency applied to the manner in which countries implement the rules the Committee has developed and agreed will help ensure full, timely and consistent implementation of the international minimum requirements".

Basel III framework for liquidity - Frequently asked questions

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the 16 December 2010 publication of the Basel III regulatory frameworks for capital and liquidity. To help ensure a consistent global implementation of Basel III, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

Germany, France Join Denmark to Fight Basel Liquidity Rules

Denmark is teaming up with Germany and France to fight rules it says will penalize the world’s third-largest covered bond market. “It’s a matter of gathering support and finding friends,” said Louise Mogensen, a department head at the Copenhagen-based Economy Ministry, in a March 7 interview. “It’s still too early to say that we’ll be successful; the commission has shown it’s ready to listen to our points.”

Eurocrats in Davos give further details to the future of the European Financial Stability Facility

(28 January 2011) Euro-zone governments will increase the lending capacity of their bailout fund and make it more flexible, but governments won't raise its current €440 billion in guarantees, European Economics Commissioner Olli Rehn said in an interview Thursday.

EU Said to Push for Liquidity Exams in 2011 Bank Stress Tests

The European Commission is pushing to include tests on bank liquidity in next year’s round of European stress tests in the wake of Ireland’s financial turmoil, according to two people familiar with the discussions. The possible changes follow concerns that the last round of tests, made public in July, didn’t show that banks could withstand funding crises, said the people, who declined to be identified because the talks are private.

This year’s Europe-wide stress tests focused on the levels of capital banks had to absorb losses and didn’t measure the risks posed by a lack of liquidity. Regulators will gather data for the tests at the start of next year, under the guidance of the European Banking Authority, the European Central Bank and the European Commission. “You need a clear view of what will be liquid and what won’t be and there are too many variables,” Simon Gleeson, financial regulatory lawyer at Clifford Chance LLP, said in a telephone interview in London today. “That’s why it hasn’t been done yet -- it’s very easy to call for but very difficult to do in practice.”

Ireland is in talks with the European Union and the International Monetary Fund on an 85 billion-euro ($113.5 billion) aid package as the authorities seek to avoid the nation’s financial crisis spreading to Portugal and Spain. Ireland’s financial system imploded after banks racked up losses when a decade-long real-estate boom ended.

ECB unveils tougher collateral rules for bank loans detoxing liquidity injections

The European Central Bank unveiled new provisions Saturday regarding key refinancing operations that should tighten some conditions for banks seeking to borrow central bank funds. The European Central Bank is to beef-up its powers to act against struggling eurozone banks in a move that could foreshadow a tougher line towards those depending on its liquidity to survive.The changes follow other reforms already proposed for the global financial system that could determine how much credit is available to drive an uncertain economic recovery. Although a largely technical change, the timing of the step is significant. ECB policymakers have become increasingly frustrated that a number of banks remain “addicted” to the offers of unlimited liquidity it has been making since the collapse two years ago of Lehman Brothers.

EURO Money Supply (M3) New Year's Eve 2009

 EURO M3 2009

Dataset name: Balance Sheet Items; Frequency: Monthly; Reference area: Euro area (changing composition); Adjustment


indicator: Working day and seasonally adjusted; BS reference sector breakdown: MFIs, central government and post office

giro institutions; Balance sheet item: Monetary aggregate M3; Original maturity: Not applicable; Data type: Index of

Liquidity scenario analysis in the Luxembourg banking sector

This paper aims to develop the basis for an approach to measure the liquidity risk sensitivity of banks in Luxembourg and to test it on real banking sector data. For this purpose we have developed four different scenarios: run on a bank, use of committed loans by counterparties, netting of the position with the parent financial group and changes in conditions of refinancing operations with the Eurosystem. The impact of all four simulations is measured by relative changes of liquidity ratios that have been introduced for this purpose.

Banks facing tougher rules on liquidity to prevent Northern Rock-style collapses

Banks could be forced to stockpile £110billion or more of extra government bonds under new rules designed to prevent Northern Rock-style collapses.

The Financial Services Authority wants banks to hold more liquid assets, including easily saleable bonds, at a potential annual cost to the sector of £2.2billion.

Firms are already sitting on nearly £300billion of ultra-safe assets, but the watchdog will demand they increase holdings to insure banks against market seizures like the one that torpedoed the Rock in September 2007.

Banks will alternatively have to show they are reducing their reliance on short-term funding, meaning loans of less than three months' duration.

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