Financial organisations need to develop and apply a systematic policy of internal charging for liquidity risk, Nigel Jenkinson, BoE executive director for financial stability said. “In particular, banks need to ensure that risk decisions made by front office traders price appropriately the liquidity risk generated by new products and business lines, rather than treating it as a ‘free good’ or overhead to be managed centrally by the treasury function.”
Speaking at the Euromoney Conference in London, Jenkinson highlighted four emerging lessons that should help prevent future problems:
The various sources of liquidity risk, particularly under stressed conditions have to be better understood. Banks als need to develop more effective contingency funding plans and should support improved market functioning and stricter market discipline through better disclosure.
Finally, supervision should ensure that banks’ liquidity risk management is undertaken to a more robust standard, in order to internalise some of the costs of a bank failure on the wider financial system.
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