A Law and Finance Approach
Chapter 6: Regulatory liquidity
Regulators had long urged banks to maintain contingency funding plans, but binding minimum standards on the bank’s funding liquidity emerged only as a result of the 2007–2008 crisis. Styled as a liquidity coverage ratio, it seeks to ensure that the bank has adequate liquidity to survive a 30-day funding crisis. The ratio does this through procedures to evaluate the liquidity of assets, to estimate the bank’s inflows, and to measure the bank’s total funding needs during the 30-day period. After breaking out each of the ratio’s major parts, the chapter makes some tentative observations about how the ratio may impact banks and their funding markets, including the development of better techniques for pricing and tracking the use of liquidity within an entity.
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