Liquidity risk mitigation: Australian and international approaches


The traditional means of managing bank liquidity risk (including deposit insurance and lender of last resort facilities) have limitations, and their inadequacy is believed to have contributed to the global financial crisis. The regulatory response has included Basel III’s Liquidity Coverage Ration and Net Stable Funding Ratio (NSFR), with APRA expected to publish an Australian version of the NSFR in late 2015. The paper focused substantially on the Committed Liquidity Facility (CLF) and the extent to which the CLF really overcomes the limitations of the lender of last resort approach experienced during the GFC. If the CLF is not added to the APRA standard, banks may be required to replace some of their short term funding. Options for achieving this may be more costly, but the paper asserts that Australian banks should pay for their own insurance against risks they are bearing and from which they are benefiting.

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This paper was presented in July 2015 at the 20th Melbourne Money and Finance Conference (MMFC), which explored the theme The Australian Financial Sector and Global Integration.

For more papers presented in the conference, please click here.