Liquidity Risk Management

At the Thomson Reuters Liquidity forum this week, the issue of liquidity risk was debated amongst a panel and audience of experts. There is no doubt about the vital importance of liquidity within markets where quite simply without it you hardly have a market. So to retain and manage liquidity is fundamental to markets and with the economic crisis in full flow answers to liquidity risk is something taxing the financial services industry as well Governments and Central Bankers.

The question of the adequacy of existing systems and mechanisms used by banks and other financial instructions to measure risks has to be answered. Certainly the risk models used within the finance industry have been unable to detect the extent of the crisis and the fallibility of leading banks within the financial system. We all thought that we understood the risks within the markets but in fact we don't. Models built on previous experiences have proved worthless. New benchmarks for risks within the financial markets are being rewritten.

One delegate and I discussed this after the event, the level of the new benchmarks and if the bar had been raised? I thought that with the exposure of the current crisis the bar needs to be lowered to capture as much risk as possible he thought the bar should be raised? This discussion is sure to be raised throughout the financial world in coming days and probably years.

What is certain is that the understanding of liquidity within markets needs to be far greater and the capability to inject liquidity when required managed to the good of the finance industry. Mechanisms to control liquidity need to be in the hands of the authorities acting to the overall good of the market and never again left to the devices of individual traders or the avarice of individual firms.

The global impact to markets of assets and the securitisation of debt instruments needs far greater transparency and appreciation by all concerned. The ability of those regulating the markets needs to be increased along with the inclusion of central banker's co-operating on a global scale.

All of the delegates at the Thomson Reuters Forum thought that regaining confidence in the financial system was paramount to recovery from the current dire situation. This will only be forthcoming if the analysis of the risks within the system produces new and deeper understanding by the whole market and importantly those investing in it.

The management of liquidity in markets appears to be a first step towards recovery.