Strengthening Bank Management of Liquidity Risk: The Basel III Liquidity Standards

The global financial crisis highlighted the importance of ensuring that the financial system has adequate liquidity to withstand adverse circumstances. The funding pressures that began in 2007 underlined the acute deficiencies in the liquidity-risk-management practices of some banks, and the severity of the ensuing crisis required massive public sector support to stem the liquidity spiral and mitigate its detrimental effect on the real economy. Managing funding liquidity risk and market liquidity risk is integral to the role that banks play in maturity transformation, which is, in turn, a fundamental aspect of intermediation between savers and borrowers that contributes to the efficient allocation of resources in the economy. If funding liquidity risk and market liquidity risk are not adequately managed, they can lead to severe liquidity spirals.