Preparing for Basel IV – Why Liquidity Risks Still Present a Challenge to Regulators in Prudential Supervision.
No Thumbnail Available
Date
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
Description
This paper considers and assesses various explanations attributed as principal factors of the recent
Financial Crisis. In particular, it focuses on two principal regulatory tools which constitute the basis
of the framework promulgated by recent Basel Committee's initiatives, that is, Basel III. These two
regulatory tools being capital and liquidity requirements.
Various conclusions have been put forward to explain what triggered the recent Financial Crisis.
This paper aims to explain why the Basel Committee's liquidity requirements and present proposals
aimed at addressing liquidity risks, still represent a very modest milestone in efforts aimed at
addressing challenges in prudential regulation and supervision. Even though problems attributed to
capital adequacy requirements are considered by many authorities to have triggered the recent
Crisis, the paper will highlight how runs on banks are triggered by liquidity crises and that liquidity
risks cannot be isolated from systemic risks. In so doing, it will incorporate the roles assumed by
information asymmetries and market based regulation – hence elaborate on how market based
regulation could serve to address problems which trigger liquidity risks. Imperfect knowledge being
a factor which is contributory to liquidity crises and bank runs, and market based regulation being
essential in facilitating disclosure - since the Basel Committee's focus on banks and prudential
supervision cannot on its own, address the challenges encountered in the present regulatory
environment.
Furthermore, it will address measures and proposals which could serve as bases for future
regulatory reforms - as well as criticisms and challenges still encountered by recent Basel
Committee initiatives.
Keywords
HG Finance