Central bank body calls for more detailed monitoring of bank liquidity risks

By Tommy Reggiori Wilkes and Stefania Spezzati

LONDON (Reuters) – Banking supervisors should ensure that individual entities of global banks have sufficient liquidity rather than just monitoring risks at group-level, the Bank for International Settlements, said on Friday in research on last year’s banking turmoil.

In a report to G20 finance ministers and central bank governors, the BIS, the umbrella body for central banks worldwide, said that current monitoring tools were broadly fit for purpose and that liquidity regulations alone cannot prevent all bank runs in age of digital banking and easy access to information. 

  The emergency takeover of Credit Suisse by UBS has forced a rethink on whether liquidity rules that emerged from the financial crisis are fit for purpose.

These regulations did little to avert last year’s crash, as clients pulled cash from banks at unprecedented speed.

Credit Suisse saw billions of deposits exiting in a matter of days, burning through what had appeared to be comfortable buffers of cash. The bank’s Swiss unit was hit the hardest.

Introduced after the 2008 financial crisis, the so-called liquidity coverage ratio (LCR) has become a key indicator of banks’ ability to meet cash demands.  

LCRs require banks to hold sufficient assets that can be exchanged for cash to survive significant liquidity stress over 30 days.

BIS’s report highlights that supervisors could boost their monitoring by improving the frequency of bank liquidity reporting, providing more granularity on how banks are funded and applying the tools to individual entities, among other recommendations.

Reuters reported earlier this year that European regulators were debating whether to shorten the period of acute stress to measure buffers banks need over shorter timeframes, of say one or two weeks. 

In Switzerland, new liquidity rules came into force this year, forcing UBS to set aside more liquidity in case of stress, but the Swiss government has said that liquidity requirements should be addressed internationally.  

“A key takeaway from the 2023 banking turmoil – most notably regarding the distress of Credit Suisse – is therefore the importance of supervisors monitoring risk dynamics throughout the group (including at an individual entity level and/or at a relevant sub-group level)…” the BIS said in its report.

The BIS said supervisors also needed to account for potential limitations on the “free transferability of capital and liquidity resources within banking groups that may arise” because of national laws or internal practices.