The regulation of bank liquidity may need to evolve in the wake of the banking sector turmoil that arose in early 2023, resulting in the failure of several mid-sized U.S. banks.
On Friday, the Basel Committee on Banking Supervision released a report for the G20 finance ministers and central banks. In it, the committee reviewed the lessons that policymakers have drawn from the stress that led to several bank failures, and UBS’ takeover of rival Credit Suisse, in March 2023 — concluding that the supervision of bank liquidity may need to change as a result.
The global group of banking regulators issued principles for supervising liquidity risk in the wake of the 2008 financial crisis, and those principles seemingly worked well, until the 2023 episode, which “highlighted clear challenges in overseeing banks’ liquidity risk,” the report noted.
According to the report, these challenges stemmed from various factors, including the speed and volume of deposit outflows, as well as the role of social media and digitalized banking in amplifying banks’ strains.
For instance, the development of faster payment and settlement services, along with on-demand access to banking services through mobile apps, have removed “many of the frictions that may have previously slowed down the magnitude of liquidity outflows,” the report noted.
At the same time, the proliferation of social media channels — including public platforms, encrypted messaging channels and internal corporate messaging services — have accelerated “the spread of concerns about banks’ viability,” whether those concerns are valid or not, and sped up the spread of depositors’ fears about incurring losses.
In turn, this raised questions for regulators about the adequacy of existing liquidity oversight practices, and whether the current approach alerts regulators quickly enough when material liquidity outflows start.
“All of the distressed banks during the 2023 banking turmoil experienced a series of liquidity shocks,” the report said. “Even though many of these banks were not subject to Basel III, the turmoil raised questions about the design and calibration of the Basel III liquidity standards.”
The episode further revealed shortcomings in liquidity risk management at the banks themselves, and a lack of contingency planning to address funding risks that arise.
“This lack of operational preparation for access to liquidity was a major driver of the difficulties that certain U.S. banks had in responding to the recent turmoil,” the report said.
It also highlighted the possibility of using alternative sources of data to monitor liquidity risks, the need to oversee concentration risks, and raised issues around banks’ stress testing, the report said.
Based on the findings of the report, the Basel Committee said it’s continuing its work to “identify issues that could merit additional guidance at a global level” — and to assess whether specific features of the existing framework, “such as liquidity risk and interest rate risk in the banking book, performed as intended during the turmoil and assess the need to explore policy options over the medium term.”