Liquidity supervision in national and international perspective - 2 February 2010
News
| Date | 2 February 2010 |
In February 2000, the Basel Committee published its "Sound Practices for Managing Liquidity in Banking Organisations". This document describes sound principles for managing liquidity-related risks. Besides various other aspects, attention was drawn to off-balance sheet positions and, for instance, contingency plans. These are qualitative guidelines.
As a consequence of the complexity of the subject matter and the varying risk profiles of banks worldwide, it proved impossible at the time to develop quantitative measuring instruments and liquidity requirements based on those. In September 2008, the Committee published a thorough revision of the principles for liquidity management. Meanwhile, the Committee has also made proposals for minimum liquidity buffers and the application of various liquidity measuring instruments. These proposals have been published and are up for consultation until 16 April 2010. In addition, a quantitative impact study (QIS) is being held in cooperation with the European Committee.
In 2003, in the absence of international quantitative instruments, DNB took the initiative to introduce a framework of liquidity and reporting requirements, having carried out a trial run in 2002. The reporting requirements, focusing on group level, replaced earlier, more nationally oriented reporting. The framework has now been integrated into the Besluit prudentiële regels Wft [Decree on Prudential Rules for Financial Undertakings].
The liquidity requirements applicable since 2003 stipulate that banks should have a minimum liquidity buffer in the form of liquid assets the size of a 30-day net capital drain that might arise in a combined stress scenario of a market crisis and a bank-specific crisis. In addition, banks have to report the 30-day period mismatches to DNB for observation. The retention of a minimum buffer for a 30-day severe stress period has now, seven years after the introduction in the Netherlands, also been included in the latest Basel proposals.
In the DNB reporting and liquidity requirements framework, off-balance positions are also weighed. The liquidity risk posed by entities such as conduits and special purpose vehicles − a risk that materialised during the crisis − is primarily one of unexpected failure to refinance those entities. In DNB’s liquidity reporting framework, this risk is accounted for by treating the debt instruments issued by these entities as debt instruments issued by the banks themselves, i.e. by consolidating them. The Dutch liquidity requirements accordingly stipulate that such liquidity risks should be compensated for by considerable liquidity buffers. As the retention of liquidity costs money, the expenses can and were charged to the business activities within banks. Such pricing is a sound principle in liquidity management. This principle, too, constitutes an explicit part of the latest Basel proposals.
The group-wide reporting and liquidity requirements framework, including off-balance positions, gave the Netherlands an internationally unique position, in particular at the time of its introduction.
