Liquidity or the ability to
fund is very crucial to the
viability of any banking organization. Management of
liquidity is one the most important activities undertaken by
banks. Sound and prudent liquidity management practices can reduce
the probability of serious problems. Since the shortfalls in liquidity
of one bank can trigger system-wide implications, the importance of
liquidity management transcends an individual bank. Owing to
its wide-ranging ramifications, liquidity management not only
requires the bank to measure the liquidity position of the bank
on a continuous basis, but also to examine how funding
requirements are likely to evolve under various stress scenarios.
The Basel Committee on Banking Supervision (BCBS), in
its works on liquidity management, has focused on developing
a greater understanding of the way in which banks manage their
liquidity on a global, consolidated basis. Over the period, the
dramatic changes that have happened in the ways banks fund their
activities have caused corresponding changes in the way banks
perceive and manage their liquidity. Declining ability to depend on core
deposits, increased reliance on wholesale funds and
continuous turmoil in the global and domestic financial markets has
changed the scenario of liquidity management. The banks are forced
to have adequate internal controls for liquidity risk management. |
