Intraday Liquidity - Risk and Regulation

Our Financial Stability Papers are designed to develop new insights into risk management, to promote risk reduction policies, to improve financial crisis management planning or to report on aspects of our systemic financial stability work.
Published on 02 June 2011

Financial Stability Paper No. 11
By Alan Ball, Edward Denbee, Mark Manning and Anne Wetherilt

Banks require access to liquidity intraday in order to settle obligations in payment and settlement systems. The recent financial crisis has highlighted the need for banks to improve their liquidity risk management, including the management of intraday liquidity risk. The FSA’s new liquidity regime includes intraday liquidity as a key risk driver and requires that banks calibrate their liquid asset buffers considering their need for liquidity intraday, both in normal and stressed circumstances. The Bank fully supports this approach. However, this will increase the cost of intraday liquidity and so could create incentives for banks to change their behaviour as they seek to minimise costs. If this results in payment delays, it risks jeopardising the smooth functioning of payment and settlement systems. There are a number of tools that authorities could use to minimise the chance of adverse behavioural changes. Such tools include the introduction of liquidity saving mechanisms, the strengthening of throughput rules, payment tariffs that vary through the day, setting central bank collateral eligibility criteria for intraday liquidity and regulatory ‘deep dive’ assessments.

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