Banking Supervisors Urged to Monitor Individual Bank Liquidity

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, according to the Bank for International Settlements (BIS) in a report released on Friday regarding last year's banking turmoil.

In a report addressed to G20 finance ministers and central bank governors, the BIS, the central banks’ umbrella body, stated that while current monitoring tools are generally effective, reliance solely on liquidity regulations cannot prevent bank runs in this digital banking age with easy access to information.

The emergency takeover of Credit Suisse by UBS has prompted a reconsideration of the liquidity rules established post-financial crisis and their effectiveness. These regulations failed to prevent the dramatic events of the previous year when clients withdrew funds from banks with unprecedented speed.

Credit Suisse experienced a rapid exit of billions in deposits within days, depleting what had seemed like adequate cash reserves. Notably, the bank's Swiss unit bore the brunt of these withdrawals.

Following the 2008 financial crisis, the liquidity coverage ratio (LCR) was introduced as a primary measure of a bank’s capacity to meet cash demands. LCRs mandate banks to possess sufficient assets that can be converted into cash to endure significant liquidity stress for a 30-day period.

The BIS report recommends enhancing supervision by increasing the frequency of bank liquidity reporting, offering greater detail on funding sources, and applying monitoring at individual entities. Earlier this year, Reuters highlighted that European regulators were discussing the possibility of shortening the acute stress measurement period to one or two weeks.

In Switzerland, new liquidity regulations implemented this year require UBS to maintain higher liquidity reserves in case of stress, although the Swiss government asserts that liquidity requirements ought to be addressed on an international level.

In summary, the BIS report emphasizes the need for supervisors to monitor risk dynamics at both the group and individual entity levels due to potential restrictions on the transfer of capital and liquidity within banking groups arising from national laws or internal practices.