DJ BOE's Jenkinson: Banks Must Improve Their Liquidity Defenses

LONDON, Apr 24, 2008 (Dow Jones Commodities News Select via Comtex) -- -- Work by both banks and public authorities is necessary to prevent a recurrence of recent market turmoil, but the primary responsibility for bolstering liquidity defenses lies with banks, a senior Bank of England official said Thursday.

The turbulence has highlighted clear deficiencies in banks' liquidity risk management and demonstrated that these deficiencies pose serious risks to financial stability and so to the economy more broadly, Nigel Jenkinson, the BOE's executive director of financial stability said in the advance text of a speech.

"Developments in financial markets have increased the importance and complexity of liquidity risk management over the past decade. That, in turn, increased the vulnerability of banks to a system-wide liquidity shock," Jenkinson said.

Preparations for such a shock had proved "inadequate and insufficient," but recent financial turmoil had provided important lessons both for banks and for public authorities and points to the need for action by both, he added.

"In the medium term, it is clear that action is needed to strengthen the financial system's defenses to liquidity risk to limit the likelihood of any recurrence of the recent problems," Jenkinson said.

Global central banks are reviewing the lessons of recent turmoil for themselves, including to make sure that use of their market operations doesn't suffer from negative stigma, he added.

However, "it is clear that primary responsibility for bolstering the defenses lies with the banks themselves and that supervisory regimes for liquidity risk need reinforcing to support that process."

In order to prevent future crises, Jenkinson said that it was important for banks and public authorities to better understand sources of liquidity risk, in particular under stressed conditions.

Banks need to develop more effective contingency funding plans, and should support improved market functioning and stricter market discipline through better disclosure.

And supervision should ensure that banks' liquidity risk management is undertaken to a more robust standard.

Jenkinson said that recent events had highlighted the need for "considerably tougher" contingency plans.

"Experience has highlighted the need to improve resilience to a sharp decline in market liquidity and to demonstrate that firms can survive the closure of one or more funding markets by ensuring that finance can be readily raised from a variety of sources," he said.

"Consideration should clearly be given to boosting holdings of very high quality liquid assets that can provide reliable reserves under all conditions. And it is important that plans are legally robust and that they are regularly tested."

He added he believed there was scope over time to achieve a degree of "enhanced, consistent" liquidity disclosure across institutions.

-By Natasha Brereton, Dow Jones Newswires; +44 20 7842 9254; natasha.brereton@dowjones.com

(END) Dow Jones Newswires

04-24-08 0430ET

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