Regulating Liquidity Risks Within "Institutional Protection Schemes"

Abstract

During an early phase of the financial crisis (2007), many financial institutions—in spite of adequate capital levels—faced heavy difficulties because they didn't manage their liquidity profile in a prudent manner. Suddenly the crisis reminded the respective sector on the importance of liquidity to the proper functioning of financial markets. In front of the times of crisis, asset markets were broad and deep, funding was readily available at low cost. The quick change in market conditions showed how fast liquidity can dry up, and that illiquidity can endure for an extended period of time. The banks faced severe stress, which required actions by central banks to—one the one hand—keep alive both the functioning of capital and money markets and—on the other hand— support individual banks or banking groups, which lost their most important funding sources. The impact of a liquidity crisis broadly differs among jurisdiction, markets and concrete