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Four lessons for banks to heed from liquidity crisis

A senior Bank of England director has warned that action must be taken by banks and regulators to strengthen the financial system’s defences to liquidity risk.

At the Euromoney conference on Liquidity and Funding Risk Management in London, executive director for financial stability Nigel Jenkinson said four lessons are emerging from the current crisis.

He said banks and public authorities need to develop a more in-depth and complete understanding of the various forms in which liquidity risk can arise.

A second lesson that banks must learn is how to develop a comprehensive approach to the management of liquidity risk to ensure it is in line with the bank’s overall risk appetite.

Jenkinson highlighted a recommendation in a report by the Senior Supervisors Group, made up of international regulators, that financial organisations develop and apply a systematic policy of internal charging for liquidity risk.

He said the third lesson is that disclosure practices in relation to liquidity risk management objectives, controls and metrics vary significantly across banks.

Jenkinson said: “While liquidity risk metrics remain complex and challenging, I believe that there is some scope over time to achieve some degree of enhanced, consistent disclosure across institutions.”

He said the final lesson is the need for stronger oversight of banks’ liquidity risk management practices.

Jenkinson said: “Developments in financial markets have increased the importance and complexity of liquidity risk management over the past decade. That, in turn, increased the vulnerability of banks to a system-wide liquidity shock. Preparations for such a shock proved inadequate and insufficient but the recent experience already provides us with important lessons both for banks and for public authorities and points to a clear need for action by both.”

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