Basel III Enhancement – Linking liquidity crisis with Liquidity Coverage Ratio and Stable Funding Ratios

2 mins read

The SAARC Finance policy response workshop on Basel II Enhancements

SBP, NIBAF and SAARC Finance organized a two day workshop on Basel III implementations and Central Banks policy response to these changes in the SAARC region. Four external speakers were invited to present to a panel of regulator and central bankers from India, Pakistan, Bangladesh, Nepal, Sri Lanka, Afghanistan and Maldives. The panel of speakers included Mr. Jason George from BIS, Hong Kong Office, Mr. Ali Samad Khan from Stamford Risk Analytics, CT, Mr. Faraz Anwar from PwC and Jawwad Farid from Alchemy Technologies.

My presentation focused on linking liquidity crisis with the Basel II enhancements and reviewing the impact of the LCR and NSFR proposals on the local banking industry now as well as in the future as well as anticipated reaction from the banking community to the recommended changes.

The fundamental premise in the analysis for liquidity risk management is that:

  1. Once you get hit by a name crisis, the resulting downward spiral is a death chant.
  2. The ending position or the end game is a liquidity driven asset sale.

A successful framework would simply jump the gun and get to the asset sale before the market does. The only reason why you would not jump the gun is if you have cash, a secured contractually bound commitment for cash, a white knight or any other acceptable buyer for your franchise and an agreement on the sale price and shareholders’ approval for that sale in place. If you are missing any of the above, your only defense is to get to the asset sale before the market does.

The Basel III framework covers this aspect by modeling a 30 and 360 day period of high liquidity stress by estimating cash flows as well as likely realizable values for your stock of liquid securities with the objective that your available stock should exceed your expected or required stock – for both liquidity and stable funding.

Basel III implementations – Part 1

Duration: 28:13 min

Here is the first part of the presentation reviewing the relationships between how a liquidity crisis unfolds and the suggested changes in the regulatory liquidity risk framework.

The second part of the presentation reviews the Quantitative Impact and conclusions based banking system data.

The two day event closed with a series of country papers reviewing the state of readiness and the banking system presented by members of the regional central banks present at the occasion.

If you would like this presenetation then you might be interested in the Basell III – Liquidity Framework course available at the Finance Course Store.

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Jawwad Farid

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