18 June 2008

Basel committee proposes new risk-management guidelines

The Basel Committee on Banking Supervision is urging the industry to enhance its risk management. The panel has proposed new banking regulations for liquidity supervision and said they should focus on off-balance-sheet exposures.

The Basel Committee on Banking Supervision is urging the industry to enhance its risk management. The panel has proposed new banking regulations for liquidity supervision and said they should focus on off-balance-sheet exposures. "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," said Nout Wellink, chairman of the committee.

 

The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas:

 

• Governance and the articulation of a firm-wide liquidity risk tolerance;
• Liquidity risk measurement, including the capture of off-balance sheet exposures, securitisation activities, and other contingent liquidity risks that were not well managed during the financial market turmoil;
• Aligning the risk-taking incentives of individual business units with the liquidity risk exposures their activities create for the bank;
• Stress tests that cover a variety of institution-specific and market-wide scenarios, with a link to the development of effective contingency funding plans;
• Strong management of intraday liquidity risks and collateral positions;
• Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress; and
• Regular public disclosures, both quantitative and qualitative, of a bank's liquidity risk profile and management.

 

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.

 

The proposed guidance focuses on liquidity risk management at medium and large complex banks, but the sound principles have broad applicability to all types of banks. The document notes that implementation of the sound principles by both banks and supervisors should be tailored to the size, nature of business and complexity of a bank’s activities. Other factors that a bank and its supervisors should consider include the bank’s role and systemic importance in the financial sectors of the jurisdictions in which it operates.

 

Deadline for comments is 29 July 2008.

 

Principles for Sound Liquidity Risk Management and Supervision

© BIS - Bank for International Settlements