Concluding remarks
No. 7 2022, 9 May
Concluding remarks
Published: 9 May 2022
The financial crisis around 2008 prompted liquidity requirements for the banks through two metrics – LCR and NSFR – which were devised internationally within the Basel Committee. These metrics are important for measuring liquidity risk, but they are not comprehensive.
LCR and NSFR show liquidity risk by focusing on how the banks’ assets and liabilities mature in each of two given time buckets. In this study, we show that the banks’ liquidity is better around these two specific time buckets, compared with many other time buckets. This might be because the banks have improved their liquidity in these two specific time buckets without any deterioration in other time buckets. It could also mean that the banks have redistributed liquidity risk between different time buckets, and now take more liquidity risk in the other time buckets compared with the period prior to the liquidity requirements in LCR and NSFR.
As a complement to the two existing liquidity metrics, liquidity risk should therefore also be measured by studying how assets and liabilities mature for all time buckets in the future. This is best done today using the maturity ladder report, which all banks in the EU, under the Capital Requirements Regulation, are obliged to report to the supervisory authorities. The Riksbank has, based on this report, defined a new metric – Deposit Loss Capacity (DLC). This metric calculates when (that is, in which future time bucket) a bank’s liquidity risks are at their highest. The metric also calculates how large a bank run a bank could cope with in that time bucket. The Riksbank is now monitoring this metric and can ascertain that there are large banks in Sweden which, during certain months before the pandemic according to this metric, demonstrated much higher liquidity risk than other large banks, despite the international metrics not exhibiting any appreciably higher liquidity risks than the other large banks. The outcome in the metric can quickly change, and it is therefore important that authorities and banks themselves monitor the liquidity risk taken by banks according to a metric such as DLC.
Economic Commentary
No. 7 2022, 9 May
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