Principles based regulation (PBR) is more advanta-
geous than a rules based approach—owing to the fact
that offbalance73 sheet debt could result from the direct
application of rules—without being able to consider
the substance of the transaction and because the imple-
mented standards do not allow such consideration. As
its secondary argument74, this paper will seek to dem-
onstrate that detailed rules could still operate within a
system of principles based regulation—whilst enabling
a consideration of the substance of the transactions
which are involved.
Regulatory standards implemented by the Basel
Committee in its recent document75 provide for
“jurisdiction-specific conditions”—for example, the
percentage of potential run-off of retail deposits which
is partially dependent on the structure of a jurisdic-
tion’s deposit insurance scheme.”76 Furthermore, the
Committee highlights that “in these cases, the param-
eters should be transparent and clearly outlined in the
regulations of each jurisdiction.”77 It also adds that this
would provide clarity both within the jurisdiction as
well as across borders concerning the precise param-
eters that the banks are capturing in these metrics, and
that there was need for public disclosures in respect of
regulatory standards.78
Good corporate governance would “provide proper
incentives for the board and management to pursue
objectives that are in the interests of the company and
its shareholders.”79 The dual faceted aspects of corpo-
rate governance relate not only to the accountability of
management to shareholders, but also to the supervision
and monitoring of management performance. Good
corporate governance should facilitate effective moni-
toring, effective management of internal controls and
risks, effective disclosure and transparency.
In considering the topics of discussion, namely,
liquidity risk measurements and monitoring, this paper
will commence with a section dedicated to liquidity
risk (and risk measurements), along with developments
which have triggered the need for particular monitor-
ing tools—both in response to global developments and
with particular reference to the increasing prominence
of liquidity risks.
The ever growing prominence and importance
of liquidity’ in prudential supervision constitutes a
vital reason which justifies the need for a prudential
supervisory framework which does not merely (and
excessively) rely on capital adequacy requirements
within such a framework.
Some arguments which revolve around the inad-
equacies of capital adequacy standards include the fact
that:80
“Capital ratios may be of limited value as indica-
tors of actual risk since reported capital positions
do not reflect the real causes of most bank failures
( the real causes of bank failures being fraud or
fast depletion of the banks’ resources).The inter-
national minimum ration of eight percent lacks
any theoretical justification. Risk related measure-
ment of bank assets is not only deeply flawed, but
also triggers substantial distortions in the relative
demand for bank assets. Since banks are in direct
competition with investment firms, so far as secu-
rities activities are concerned, the imposition of
capital burdens on banks erodes their ability’ to
compete.”
Paragraph 56 of the Basel Committee on Banking
Supervisions Principles for Sound Liquidity Risk
Management and Supervision states that
“A bank should have a reliable management infor-
mation system designed to provide the board of
directors, senior management and other appropriate
personnel with timely and forward-looking infor-
mation on the liquidity position of the bank. The
management information system should have the
ability to calculate liquidity positions in all of the cur-
rencies in which the bank conducts business—both on
a subsidiary∕branch basis in all jurisdictions in which
the bank is active and on an aggregate group basis. It
should capture all sources of liquidity risk, including
contingent risks and the related triggers and those aris-
ing from new activities, and have the ability to deliver
more granular and time sensitive information during
stress events. To effectively manage and monitor its net
Rmding requirements, a bank should have the ability
to calculate liquidity’ positions on an intraday basis, on
a dav-to-dav basis for the shorter time horizons, and
over a series of more distant time periods thereafrer.
The management information system should be used
in day-to-day liquidity' risk management to monitor
34 * banking & Financial Services Policy Report
Volume 30 * Number 9 ♦ September 2011