Liquidity In Banking System

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Basel III also known as “A global regulatory framework for more resilient banks and banking systems” was introduced to increase the strength of the banking sector, improve regulatory and supervisory activities and risk management within banks. It aims at directing banks towards maintaining a higher level of capital and also accessing the quality and quantity of capital, which is more comprehensive as compared to Basel II, to facilitate banks to absorb shocks during economic or financial stress. Basel III was introduced after the occurrence of the 2008 financial crisis affecting internationally present banks having inadequate liquidity buffers. This accord made numerous additions to the norms laid down under Basel II. The three
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Banks experienced difficulties during the financial crisis even though the prescribed level of capital was maintained as per the Basel II norms. Prior to the financial crisis, there was enormous liquidity in the market and funds were available at low cost. On the occurrence of the financial crisis which drew out liquidity from the market, there persisted severe stress in the banking system.
Two objectives of maintaining liquidity ratios were: To ensure banks in maintaining adequate liquid resources in time of stress. Resources must last for a month. To facilitate banks’ resilience in the long term by arriving at incentives for banks to maintain more stable sources for
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It comprises of intraday liquidity risk applicable to the bank during trading hours. It also includes accessing liquidity risk profiles on a regular basis. Metrics may be developed to access the concentration of funding towards a specific currency, counterparty or instrument. Another metric to measure the available unencumbered assets i.e. the potential collaterals that could be accepted in case of secured funding. The Liquidity coverage ratio currency wise may be checked by the supervisor on a regular basis. Banks must have a source of receiving instant data for liquidity difficulties and also monitor prices of various liquid securities and price of assets in the market. LEVERAGE RATIOS
A key feature of the financial crisis, there was excessive leverage in the banking system with regard to on-balance sheet and off-balance sheet exposures. Hence, during the crisis, the banks were forged to reduce the loans towards these exposures as a result of deteriorating value of the asset prices.
Leverage ratio, a component of Pillar I, may be applied to banks on the discretion the RBI. This is to be computed on a quarterly
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