Measuring and Managing Liquidity Risk both from an Economic and a Regulatory Perspective

Apparently at the start of the crisis in 2007, it became obvious that the situation of the refinancing markets for banks was quickly becoming a primary problem for the stability and profitability of banks and even the financial markets. The really forward looking banks had already started a decade before to simulate, measure and manage their funding liquidity risk in an economic view. Shortly after the peak of the crisis 2008 the regulatory bodies responded by introducing such regulations as Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Although simply meeting these regulatory requirements is an upcoming challenge, banks must take this opportunity to go beyond pure regulatory requirements and integrate them with their economic steering of liquidity. By taking a more thorough approach and truly managing economic liquidity risk, organizations will be able to also satisfy upcoming regulations and be ideally placed to meet further changes in the regulatory landscape.