Although the members of the Basel Committee have not yet achieved a final consensus on the exact structure of an operational liquidity management framework, the proposed new standards for liquidity risk management are a welcome development. In combination with a more robust and efficient supervisory landscape, the proposed Basel III recommendations should help to bolster liquidity risk management practices in the financial sector.
This will have an overall welfare-enhancing effect on the real economy and will help to ensure the stable provision and access to liquidity and funding between financial institutions. In addition to reducing the risk of a rapid drying up of liquidity, this will aid considerably in mitigating the risk of excessive interconnectedness in the financial system by encouraging banks to reduce their common exposures.