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2018 | Book

Bank Liquidity and the Global Financial Crisis

The Causes and Implications of Regulatory Reform

Introduction Read first chapter

Book Series: Palgrave Macmillan Studies in Banking and Financial Institutions

Author: Prof. Laura Chiaramonte

Publisher: Springer International Publishing

Print ISBN: 978-3-319-94399-2

Electronic ISBN: 978-3-319-94400-5

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

One of the lessons learned from the Global Financial Crisis of 2007–9 is that minimum capital requirements are a necessary but inadequate safeguard for the stability of an intermediary. Despite the high levels of capitalization of many banks before the crisis, they too experienced serious difficulties due to insufficient liquidity buffers. Thus, for the first time, after the GFC regulators realized that liquidity risk can jeopardize the orderly functioning of a bank and, in some cases, its survival. Previously, the risk did not receive the same attention by regulators at the international level as other types of risk including credit, market, and operational risks. The GFC promoted liquidity risk to a significant place in regulatory reform, introducing uniform international rules and best practices. The literature has studied the potential effects of the new liquidity rules on the behaviour of banks, the financial system, and the economy as a whole.

This book provides a comprehensive understanding of the bank liquidity crisis that occurred during the GFC, of the liquidity regulatory reform introduced by the Basel Committee with the Basel III Accord, and its implications both at the micro and macroeconomic levels.

Table of Contents

Frontmatter

Chapter 1. Introduction
Abstract
Chiaramonte introduces the aim of the book providing an overview of the importance of bank liquidity risk, especially after the Global Financial Crisis. The chapter highlights the need to better regulate it in order to minimize its potential negative impact on bank stability. Finally, the author underlines the importance to investigate the implications of the liquidity regulatory reform introduced by the Basel Committee with the Basel III Accord, both at the micro and macroeconomic levels.
Laura Chiaramonte

Chapter 2. The Concept of Bank Liquidity and Its Risk
Abstract
Chiaramonte investigates the role of liquidity within the financial system. The chapter defines liquidity identifying three different types (central bank, funding and market liquidity) and their related risks. Focusing on the workings of the financial system and the role of central banks, the chapter reviews linkage between the three types of liquidity in normal and turbulent times. In light of the interdependence of financial and capital equilibrium, the chapter clarifies the relationship between liquidity and solvency, related but not interchangeable concepts. Finally, the author reviews bidirectional risk relationships, highlighting the circular pattern of cause and effect.
Laura Chiaramonte

Chapter 3. The Bank Liquidity Issues During the Subprime Crisis
Abstract
Chiaramonte investigates banking liquidity problems during the subprime crisis of 2007–2009. The chapter focuses on the main characteristics of the banks most affected by these issues, the type of liquidity problems they faced, and how the liquidity crisis affected solvency in many financial institutions, undermining their stability. Due to the key role of liquidity shortages in determining distress in the banking sector, the chapter ends with an overview of the main studies that investigated the policies designed to prevent and manage liquidity crises.
Laura Chiaramonte

Chapter 4. The Role of Central Banks and the Interbank Market in Managing Bank Liquidity During the Global Financial Crisis
Abstract
Chiaramonte investigates the role of central banks and the interbank market in managing banking liquidity during the global financial crisis (GFC). Focusing on the link between monetary policy and liquidity management, the chapter analyzes the operating framework for the three main central banks involved in the crisis (the ECB, FED and Bank of England) and the exceptional instruments used to deal with the crisis. The author reviews the main theoretical contributions related to the role of the interbank market in the transmission of financial crises, and the functioning of this market during the GFC.
Laura Chiaramonte

Chapter 5. Bank Liquidity Regulation Before the Global Financial Crisis
Abstract
Chiaramonte provides an overview of bank liquidity regulations before the GFC. Focusing on both the Basel I and II Accord (of 1988 and 2004, respectively) and on the failure of the Basel Committee on Banking Supervision (BCBS) to foresee banking liquidity risk, the chapter analyzes the main aims of liquidity risk management and its principal components. It ends with an analysis of role of supervisors in liquidity risk management.
Laura Chiaramonte

Chapter 6. The New International Liquidity Regulatory Framework for Banks
Abstract
The author investigates the new international bank liquidity regulatory framework introduced after the GFC. Illustrating the new liquidity rules applicable to banks, the chapter reviews the common principles for sound liquidity management and supervision (so-called Sound Principles) as defined by the Basel Committee in September 2008 and, then, describes the two minimum liquidity standards for banks introduced by Basel III of 2010 (the Liquidity Coverage Ratio—LCR, and the Net Stable Funding Ratio—NSFR). Chiaramonte provides an overview of Basel III liquidity requirements and the monitoring tools designed to strengthen and further promote global consistency in the supervision of liquidity risk.
Laura Chiaramonte

Chapter 7. The Implications of Basel III Liquidity Regulatory Reform
Abstract
Chiaramonte investigates the implications of Basel III liquidity regulatory reform. The chapter analyzes the possible strategies for banks to meet the Basel III liquidity ratios and their potential costs and benefits. As well as looking at the results of existing empirical studies, the chapter reviews the impact of the liquidity requirements on banking behavior. Chiaramonte surveys the results of Quantitative Impact Studies (QIS) carried out over the period 2012–2016 by the Basel Committee on a representative sample of banks in 27 countries, investigating the compliance of banking systems with Basel III liquidity ratios.
Laura Chiaramonte

Chapter 8. Conclusion
Abstract
Chiaramonte gives an overview of the main lessons learned from the GFC of 2007–2009 with reference to bank liquidity. The chapter underlines that despite the high levels of capitalization of many banks before the crisis, they too experienced serious difficulties due to insufficient liquidity buffers. Thus, the author provides an evidence that capital and liquidity are equally important for bank stability, in light of which, in 2010, the Basel Committee reviewed the Basel II Accord and introduced new prudential regulations in its place, the so-called Basel III Accord. Finally, Chiaramonte concludes the chapter summarizing both the main strategies adopted by banks to meet the Basel III liquidity ratios and the micro and macroeconomic implications of these requirements identified by the existing literature.
Laura Chiaramonte

Backmatter

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