New Approaches to Liquidity
The Act recognises that liquidity is at least as important as capital adequacy, which was
overlooked in the wake of intense regulatory focus on capital adequacy. There is no Basel I
or Basel II for liquidity to match the equivalents for capital. Assessment will need to be on stress-test scenarios, rather than models which seek to infer the probability distribution of risks
from the observation of the past. New approaches will need to reflect the lessons learnt from
the financial crisis – that market-wide collapses in the liquidity of specific asset or funding
markets can have huge impacts which analysis of individual specific risks will not capture