Oct 11 2024: Banking supervisors should ensure that liquidity risks are monitored not just at the group level but for individual entities within global banks, according to the Bank for International Settlements (BIS). In a report released Friday to G20 finance ministers and central bank governors, the BIS emphasized the need for more granular liquidity monitoring following last year’s banking turmoil.
The report, which reflects on the emergency takeover of Credit Suisse by UBS, raises concerns about whether current liquidity regulations, introduced after the 2008 financial crisis, remain adequate in the digital banking age where information spreads rapidly. The collapse of Credit Suisse saw clients withdraw deposits at unprecedented speeds, swiftly depleting what seemed like adequate cash buffers. Its Swiss unit was particularly affected.
The liquidity coverage ratio (LCR), a key metric for banks to meet short-term cash demands during periods of stress, was designed to prevent such collapses. However, the BIS points out that these regulations were not enough to avert last year’s crisis. The LCR requires banks to hold sufficient liquid assets to withstand liquidity stress for 30 days, but the report suggests that supervisors may need to increase the frequency and detail of liquidity reporting to capture more precise funding dynamics at the individual entity level.
Earlier this year, Reuters reported that European regulators were considering shortening the timeframes for liquidity stress tests, potentially focusing on one or two weeks instead of 30 days.
In Switzerland, new liquidity regulations introduced this year require UBS to maintain higher liquidity buffers in case of stress, but Swiss authorities have called for international coordination on liquidity rules.
The BIS report stresses that monitoring liquidity risks across all entities within a banking group is critical, particularly given the legal or internal barriers that might restrict the free transfer of capital and liquidity between subsidiaries.
4o
