Third, in terms of the evolving global prudential framework, the emphasis has generally been more on capital, as a means of reducing vulnerability to risks, than on prudential requirements for liquidity risk. Aspects relating to liquidity have been largely left to each regulator to assess and prescribe a suitable framework under Pillar II of Basel II.
In the Indian context, while banks have flexibility in devising their own risk management strategies as per Board approved policy, the Reserve Bank has taken steps to mitigate liquidity risks at the very short-end, risks at the systemic level and at the institution level as well (Reddy, 2007c).