Basel Faulty!
Basel II & III set out the best practice for banks in managing their liquidity. Industry regulators have embarked on the task of defining the measures and controls within their respective jurisdictions that must be adopted by banks. The Basel pillars put in place reserve silos as counter measures to the trading risks of banks, yet it seems that a silo approach to risk management may not succeed and could be unnecessarily costly when credit, settlement and liquidity are a closely linked cycle of risk.
To some extent a silo approach to risk management is the reason why banks find themselves struggling to control end to end transaction risk. I recently heard a seasoned back office practitioner say of settlement risk “I wish credit would pay more interest to the benefit of intraday reconciliation”, I asked “wouldn’t they also be interested in the liquidity funding risk created by failed settlement?” The answer: “that is a different part of credit” and this is my point, the officer looking at liquidity funding risk is reacting to outcomes of failed settlements. But a pro-active management of the counterparty risk through tracking of settlements and addressing counterparty issues before currency cut-off would prevent the outcome of a liquidity funding risk.
The pillars need to be rearranged into a credit, settlement, liquidity risk triangle, to manage the risk cycle in an holistic way and counter the various forces acting on it. To be certain of financial stability banks need to maintain the equilibrium of the triangle. Fundamental to this is the timely view of cash in the bank’s accounts, reconciliation to trade settlement and optimisation of the liquidity available.
Manuel, take these pillars to room 101.
