Liquidity regulation makes a comeback

Abstract

The Basel III regulatory framework involves the introduction of the first internationally harmonised regulations on banking liquidity. The new regulations are largely a consequence of the storms experienced on the financial markets in recent years. In autumn 2008, a lot of banks found themselves in liquidity difficulties, when the markets for many securities and financial contracts previously considered liquid ground to a halt. The point of the new regulations is to force banks to protect themselves from these types of problems. This article presents the background to the liquidity reform and assesses liquidity regulation with the aid of theoretical economic models.