Intraday Liquidity: Risk and Regulation

26 Pages Posted: 15 Jun 2011

See all articles by Alan Ball

Alan Ball

Bank of England

Edward Denbee

Bank of England

Mark J. Manning

Bank of England

Anne Wetherilt

Bank of England

Date Written: June 2, 2011

Abstract

Banks require access to liquidity intraday in order to settle obligations in payment and settlement systems. The recent financial crisis has highlighted the need for banks to improve their liquidity risk management, including the management of intraday liquidity risk. The FSA’s new liquidity regime includes intraday liquidity as a key risk driver and requires that banks calibrate their liquid asset buffers considering their need for liquidity intraday, both in normal and stressed circumstances. The Bank fully supports this approach. However, this will increase the cost of intraday liquidity and so could create incentives for banks to change their behaviour as they seek to minimise costs. If this results in payment delays, it risks jeopardising the smooth functioning of payment and settlement systems. There are a number of tools that authorities could use to minimise the chance of adverse behavioural changes. Such tools include the introduction of liquidity saving mechanisms, the strengthening of throughput rules, payment tariffs that vary through the day, setting central bank collateral eligibility criteria for intraday liquidity and regulatory ‘deep dive’ assessments.

Suggested Citation

Ball, Alan and Denbee, Edward and Manning, Mark J. and Wetherilt, Anne, Intraday Liquidity: Risk and Regulation (June 2, 2011). Bank of England Financial Stability Paper No. 11, Available at SSRN: https://ssrn.com/abstract=1864638 or http://dx.doi.org/10.2139/ssrn.1864638

Alan Ball

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Edward Denbee (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark J. Manning

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Anne Wetherilt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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