Reducing Liquidity Risk: A New Imperative
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Overview: Recent events in the financial markets have made it clear that all concerned parties--from politicians to regulators to investors to banks themselves--have overlooked the interrelationships among liquidity and other risks inherent in the activities of financial institutions. Liquidity, a secondary risk, is closely linked to credit, market, and operational risks that have been the primary focus of regulators in recent years. As a result, liquidity and liquidity risk management have been subject to less internal and external governance than they should have. Clearly, liquidity management is a vitally important function that banks and other players in the financial markets have recently overlooked. It is equally clear that new capital adequacy requirements do not facilitate the proper management of liquidity and liquidity risk, nor do they support managers and regulators in the measurement and control of liquidity risk.