The Basel III framework for liquidity standards and monetary policy implementation
AbstractBasel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the liquidity provision to banks during normal times and in a financial crisis, the treatment of central bank operations in the regulation is obviously important. To ensure internalisation of liquidity risks (i.e. pricing of liquidity risk) and to address excessive reliance ex ante on central bank liquidity support by the banks, the regulation deliberately does not establish a direct close link with the monetary policy operational framework. While this reflects the purpose of the regulation and is also natural outcome of an international rule being applied under a multitude of very different monetary policy operational frameworks, this paper shows that the interaction between the two areas can be substantial, depending on the operational and collateral framework of the central bank. This implies the need for further study and the development of policies at the central bank and regulatory/supervisory side on how to handle these potential interactions in practice.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2011-041.
Length: 45 pages
Date of creation: Jul 2011
Date of revision:
Basle III; Liquidity Risk; Banking Regulation; monetary policy implementation;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-BAN-2011-07-21 (Banking)
- NEP-CBA-2011-07-21 (Central Banking)
- NEP-MAC-2011-07-21 (Macroeconomics)
- NEP-MON-2011-07-21 (Monetary Economics)
- NEP-REG-2011-07-21 (Regulation)
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- Georgi Petrov Georgiev, 2012. "Practical aspects in measuring and monitoring the liquidity risk pursuant to the Basel III international framework," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 144-164.
- Bonner, C. & Eijffinger, S.C.W., 2012.
"The Impact of the LCR on the Interbank Money Market,"
2012-075, Tilburg University, Center for Economic Research.
- Clemens Bonner & Sylvester Eijffinger, 2012. "The Impact of the LCR on the Interbank Money Market," DNB Working Papers 364, Netherlands Central Bank, Research Department.
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