Banking Exam Question - What are the NRB Directive about Liquidity Risk Management Techniques in Banks & Financial Institution? Explain

Introduction - Liquidity Risk Management

Banks are often evaluated on their liquidity, or their ability to meet cash and collateral obligations without incurring substantial losses. In either case, liquidity management describes the effort of investors or managers to reduce liquidity risk exposure.

Techniques:

• Liquidity risk tolerance given systemic risk: importance of bank within payment and settlement systems
• Role of deposit insurance in a liquidity crisis
• Regulatory responses to liquidity problems: guarantees, insurance, re-capitalisation, bad banks
• Remedial actions: required actions from bank to strengthen liquidity risk management and contingency planning, restrictions
• Due diligence synopsis
• Basel II: pillar III disclosure requirements on liquidity
• Basel III developments: Liquidity Coverage Ratio and the Net Stable Funding Ratio
• Examining regulatory responses and options to bank resolution in a crisis, distinguishing liquidity failure from solvency failure