The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Banking

Bank liquidity: Liquidity buffers need rebuilding

Risk-free nature of government bonds in doubt; Regulators’ continuing trust in his paper under challenge.

The panic over possible sovereign defaults seemed to have receded over the summer as investors focused instead on governments’ debt-reduction plans. Regulators did their best to assuage secondary concerns over banks stuffed full of sovereign bonds by pushing through their stress tests, and banks regained access to market funding. But big questions remain.

One reason why banks had gorged on government bonds was to build up so-called liquidity buffers of high-quality assets that could easily be turned into cash in the event that another system-wide crisis or bank-specific problem should scare off bondholders and depositors.

Over the past few months bank managements have been boasting about the size of their liquidity buffers, rather as they once boasted about their reported earnings or returns on equity.

Sadly, rather like those reported returns, it might turn out that the liquidity buffers have provided a largely illusory comfort to investors. Sovereigns have stayed current on their debt service, albeit with assistance in the case of Greece. But the illusion that developed-country government bonds are genuinely risk-free has been shaken and the notion of their guaranteed liquidity has been shattered.

If regulators are to perform their duty to ensure the soundness of the system, if bank management teams are to fulfil their obligations to investors, customers and employees, then what properly qualifies for inclusion in their liquidity buffers will have to be reconsidered.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree