Basel Committee finds liquidity risk principles still fit for purpose

 The committee conducted a review of the 'Sound Principles', which were introduced a decade ago in the wake of the financial crisis, to help banks manage their liquidity and identify risks.

The review found that all of the member jurisdictions of the committee, which covers 28 countries, had implemented the Sound Principles through regulation, published guidance or supervisory practice.

The committee said global liquidity standards introduced as part of the 'Basel III' reforms of bank capital adequacy were important complements to the Sound Principles, and meant that "banks and supervisors should continue to heed the broader liquidity risk management considerations set out in the principles".

However it added that since 2008 there had been a number of developments in financial markets which would have a bearing on banks' liquidity risk management. These included "the increasing digitisation of finance and payment systems and the broader growth of financial technology; a greater use of central clearing of derivatives and margining, and the increasing risk and magnitude of cyber-attacks."

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said: "It is reassuring that the principles have been found to still be fit for purpose a decade after they were introduced in response to the financial crisis which was essentially due to liquidity evaporating in the financial markets."

"The fact that the review focuses on the need for banks as well as their supervisors to remain vigilant highlights the increased number of banks, including smaller challenger banks which have commenced operations in the past 10 years," Anderson said.

"The establishment of fintechs and digitisation, as well as cyber related risk were less obvious developments when the principles were first formulated. Nevertheless, these areas as well as others, such as the regulatory drive to more centrally cleared derivatives, have resulted in banks needing far more sophisticated and complex liquidity risk arrangements than what was in place with the introduction of the principles," Anderson said.

"This need is only likely to increase in the coming years along with the requirement for enhanced supervision and monitoring by financial regulators and central banks alike," Anderson said.

The committee said it expected market participants to remain vigilant in their liquidity risk management, and risk management should be consistently and rigorously applied throughout the economic cycle, regardless of market liquidity conditions.

A report last year by the European Banking Authority found that EU banks required €24.5 billion of capital to comply with the full implementation of Basel III by 2027. The Basel III regulations were finalised in December 2017 and implementation begins in 2022.