With the introduction of tighter regulation and closer scrutiny from investors, liquidity risk is one of the most pressing business concerns facing organisations today. This article looks at how banks should manage such risk.
The list of credit crunch casualties is now a familiar sight in the press. Northern Rock, Bear Stearns and Lehman Brothers are just a few names to have fallen by the wayside in the last eighteen months. It’s a popular misconception that credit risk was to blame for the death of these organisations; the real killer was lack of liquidity. With institutions now working to recover their reputations and the trust of the market, liquidity risk has become a serious business issue.
If your business is perceived – rightly or wrongly – to be weak in terms of liquidity, public and corporate confidence drains away. Confidence has also played a significant part when it comes to cash. When banks begin to find themselves in trouble, a common knee-jerk reaction is to rush to fill the coffers with cash. In actual fact, this approach can stir up suspicions that the scale of the problem is far worse than it really is, creating a huge reputational risk and further damaging investor and market confidence.
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