their risk profile, but that such processes correspond
to the size and complexity of the institution.” Certain
incentives which assume the form of capital reductions
are considered by the Basel Conmiittee to “impose
minimum operational standards in recognition that
poor management of operational risks (including legal
risks) could render such risk mitigants of effectively
little or no value and that although partial mitigation is
rewarded, banks will be required to hold capital against
residual risks”.
Information disclosure should be encouraged for
several reasons, amongst which include the fact that
imperfect information is considered to be a cause
of market failure—which “reduces the maximisation
potential of regulatory competition”, and also because
disclosure requirements would contribute to the reduc-
tion of risks which could be generated when granting
reduced capital level rewards to banks who may have
poor management systems.
Response to Consultative Document—
International Framework
For Liquidity Risk Measurement,
Standards and Monitoring
A. Introduction
The Basel Committee’s recent focus is reflected
through its goals of not only intensifying the “resilience
of internationally active banks to liquidity stresses”, but
also intensifying international harmonisation of liquidity’
risk supervision. These efforts are aimed at consolidat-
ing recent work which culminated in the issue of the
Principles for Sound Liquidity Risk Management and
Supervision.69
As part of measures aimed at facilitating “further
consolidation and promotion of consistency in inter-
national liquidity’ risk supervision”, and in response to
the “inaccurate and ineffective management of liquidity’
risk”—such ineffective management being a prominent
feature of the financial crisis, the Basel Committee has
developed a minimum set of monitoring tools to be used
in the “ongoing monitoring of the liquidity’ risk expo-
sures of cross border institutions and in communicating
these exposures amongst home and host supervisors.”70
This paper is structured in accordance with identi-
fied components which are considered to be essential
to the successful implementation of the (two fold)
topics of discussion of this paper, namely, monitor-
ing and liquidity risk measurements. The importance
of Successflilly communicating results obtained from
monitoring and measuring such risks, and the role of
corporate governance in ensuring such effective com-
munication, constitutes a recurring theme throughout
this paper. The identified components are as follows:
(i) Corporate governance (ii) Internal controls (iii)
Disclosure (iv) Management of risk (v) Substance over
form (vi) Transparency.
As well as highlighting the interdependence of these
components, the paper also aims to accentuate the
importance of individual components. Whilst no hier-
archy of importance is assigned to these components,
corporate governance and internal controls are two
components which are analysed in greater depth (than
other components). Furthermore, corporate governance
could be accorded a status of greater importance than
internal controls having regard to the fact that whilst
internal controls relate to a very vital control aspect
of an organisation, corporate governance relates to all
processes—be it decision making, control, production,
performance, within a company/bank.
Disclosure and transparency embody the same goals,
whilst the effective management and measurement of
risks, and liquidity’ risks in particular, are aims which the
internal control function and management should strive
to achieve. The theme “substance over form” draws
attention to creative accounting practices and the need
for greater emphasis on principles based regulation.
Creative accounting and “window dressing” of figures
in the financial statements are ever recurring issues
arising from corporate collapses—as also recently high-
lighted by the recent crises which involved Lehman
Brothers.
Whilst the danger of formalism lies in the exercise
of “creative compliance”,71 inherent problems of anti
formalism are considered to include:72
• The fact that citizens have the right to know exactly
what is prohibited in advance of behaviour rather
than in retrospect
• That broad rules are imprecise and over inclusive
• That anti formalism could result in ineffective con-
trol—where it is impossible to implement
Volume 30 ∙ Number 9 ∙ September 2011
Banking & Financial Services Policy Report ∙ 33