The financial turmoil of 2007 has once again underscored the importance of liquidity to the functioning of both the financial markets and the banking sector. A cataclysmic change from buoyant, liquid markets just before the crisis, to an extended period of illiquidity put the global banking system under severe stress. In February 2008, the Basel Committee noted that many banks had failed to follow some basic principles of liquidity management during times of abundant liquidity. In its paper titled ‘Liquidity risk management and supervisory challenges’,38 the Basel committee pointed out that

  1. Most of the banks which exposed themselves to severe liquidity risks did not have the requisite framework to support ...

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