Under Basel II's second pillar, banks are required to have an internal process for assessing capital adequacy, the ICAAP, to ensure that all risks are adequately captured. A bank's pillar 2 assessment should cover the full range of risks facing an institution, which of course include liquidity risks. This internal process will be subject to rigorous supervisory review.
I believe that adequate stress and scenario testing for potential asset expansions arising from liquidity shocks is crucial. 6  Bank for International Settlements (2008), "Liquidity Risk: Management and Supervisory Challenges," February 28. 7  Financial Stability Forum (2008), Interim Report to the G7 Finance Ministers and Central Bank Governors, February 5.