The essay will analysis and discuss risk and regulation method for banks. There are different types of risks in bank operation; for instance, interest rate risk, credit risk, liquidity risk and operation risk. This essay will focus on the liquidity risk problem in bank and regulation countermeasure of liquidity risk. Regulators improved level of risk management after global financial crisis; therefore, the Basel Banking Supervision Committee put forward new principle to reduce bank risk.
The key finding is new regulation from Basel? to manage liquidity risk in this essay. Introduction In recent years, banks became increasingly complex institutions and exposed to an intertwined set of risks. There are different types of risks in bank; it focuses on the liquidity risk in this essay. Banks faced more serious liquidity risk, in order to increase bank cash flow and liquidity assets. The liquidity risk plays an important role for commercial bank operation. The liquidity risk indicates that bank lacks of marketability of investment and cannot sale it quickly to prevent loss. Nikolaou, 2009).
The liquidity risk has two types, one is funding liquidity risk and another one is market liquidity risk. (Nikolaou, 2009). The strong of uncertainty and destructiveness are characteristics of liquidity risk; therefore, liquidity risk also called the most deadly risk for commercial banks. In 2008 global financial crisis, the liquidity risk was also one of trigger for Lehman Brother Bank bankruptcy. Liquidity risk problems become more and more important reason of bank failure; therefore, this is reason for author select liquidity risk to analysis.
Analysis There are different types of risks in banks; for example, interest rate, liquidity risk, credit risk and default risk. After global financial crisis, the liquidity risk became a serious problem for bank bankruptcy. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity. (Jeffrey, 2011). The liquidity risk is a key issue for investment portfolios, liquidity securities of investments that have a ready market and relatively stable price over time. (Hudings, 2013) Basel Banking Supervision Committee improved Basel? o Basel? and issued new standard for liquidity risk regulation.
The two ratios can calculate an accurate data to evaluate liquidity risk in banks. The two ratios measure the financial stability arising from the improvement in the bank and reduce the risk of financial sector to the real economy. Conclusion The liquidity risk plays an important role in financial crisis, it also a key trigger to make bank failure. Regulators issued many policies to prevent liquidity risk; for instance, liquidity ratio and liquidity buffer.
These policies lack of power of regulation to liquidity risk after financial crisis; therefore, regulator issued new standard to manage liquidity risk- Liquidity Coverage Ratio (LCR) and Net Stable Founding Ration (NSFR) from Basel? Accord. The two ratios will become more important model to evaluate liquidity risk. LCR ratio improves the short-term resilience of a bank’s liquidity risk and the NSFR ratio can stable balance sheet. Besides, the two ratios can calculate from formula; moreover, result of ratios evaluates liquidity risk accurately.