Changes in European banking líquidity management and regulatory updates through the Basel accords, caused by the 2007 financial crisis.

Abstract

The current financial crisis has brought a big step up in the importance of proper liquidity management in banking. Starting with the fall of the British lender Northern Rock due to a temporal liquidity shortage, we have seen often wholesalemarket disruptions as well as a strong reduction in the interbank market, being bothof them fundamental pieces in banking liquidity management. As a consequence it appear the need for the European Central Bank to intervene with extraordinary and decisive funding mechanisms, as well as the requirements from the Basel Committee to increase sharply the amount of high quality liquid assets in the balance sheet ofbanks to overcome any potential crisis. The implementation of the later due January 2013 has been recently postponed to 2015 to give enough room for banks to be readyto comply with it. On the other hand, this new requirements that imply the need to have a bigger percentage of liquid assets in the balance sheet, together with the needto reduce the total balance sheet size to comply with the new capital requirementsof Basel, will have as a collateral effect the reduction of funding to individuals and companies.