The Principles of Banking, 2nd Edition

PART IIIBank Liquidity Risk Management

As we emphasised in the Preface, the art of banking is essentially the art of liquidity management. It is the key principle of banking. Part III of the book is dedicated exclusively to liquidity management, liquidity reporting, liquidity risk management and liquidity stress testing.

In Chapter 11 we consider the basic liquidity principles, which form the cornerstone of a sustainable bank business model. We emphasise sustainable here – as the experience of the financial crisis of 2007–2009 illustrated, it is easy for senior management to forget the importance of liquidity management during an extended period of plentiful and cheap liquidity. (Although perhaps not so easy as we get into the third decade of the 21st century. The onerous and intrusive nature of banking regulation and the supervision process makes it hard for anyone to forget the importance of too much that is on the regulator's radar these days.) It is also easy for business line heads to think that any crisis is a rare one-off and unlikely to appear again (at least in their careers), especially when it comes to assumptions on liquidity. However, the importance of banks to the well-being of the economy means that it is necessary for them to follow a strategy, and liquidity principles, that remain successful in the long term, and continuously over the business cycle. There is no long-term viable alternative to the principles described in Part III of the book.

Further chapters ...