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Managing Risk in the Financial System

Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.

Chapter 19: Capital and Liquidity Reform – A New Global Agenda

George A. Walker

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law


George A. Walker A new framework for capital and liquidity regulation has been agreed to by the Basel Committee on Banking Supervision. Banks were strongly criticized for holding low capital and liquidity levels immediately before the crisis which prevented them from absorbing subsequent losses as the crisis unfolded. Central banks and finance ministries were then forced to inject substantial amounts of market liquidity and then bank guarantees and capital to stabilize the markets. The Basel Committee on Banking Supervision has been examining the lessons to be drawn from the crisis and revising its capital adequacy framework over the last two years and was able to agree a core new framework in September 2010. It has also extended this to include a basic liquidity framework for the first time. This was a significant achievement especially on the second anniversary (to the week) of the collapse of Lehman Brothers in September 2008. Work continues in other areas including requiring banks to draw up resolution and recovery plans (referred to as ‘living wills’ in the UK or ‘funeral plans’ in the US). Special bank resolution regimes have been adopted in many countries, such as under the Banking Act of 2009 in the UK, and larger macro-prudential oversight regimes are being established to monitor sector- and systems-wide risks and exposures. Governance and compensation arrangements have been strengthened with a number of new codes of practice or guidelines issued in connection with executive remuneration and with the threat of further levies or tax penalties in...

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