Basel III and critical challenges in liquidity for Mauritius banks
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The art of banking is that of managing liquidity. While capital is rightly viewed as being of utmost importance to a bank’s risk manager, the practitioners’ common saying that “capital kills you slowly, while liquidity kills you quickly” is indeed an accurate one.
Because banks are so important to the economy’s health, central banks operate as “lenders of last resort” to assist any bank that finds itself in liquidity difficulties. But a bank that has to resort to the central bank has failed, and this is a failure of its management. A reliance on a central bank, even in the post-crash era of extensive central bank involvement in providing market funding (most obviously by the European Central Bank), is to abrogate one’s responsibility as a bank manager.
In this article, we review the current challenges in liquidity risk posed by the requirements of the Basel III liquidity regime, and specifically its liquidity coverage ratio (LCR) reporting metric.
Liquidity is defined as the ability to meet obligations when they become due. The important part is to understand exactly what is meant by “when they become due”. Essentially this means in perpetuity, or at least as long as we wish the bank to remain a going concern. In other words, maintenance of liquidity at all times is the paramount order of banking...
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