The subsiding turmoil in financial markets heralds an era with vast revisions of risk management conventions and regulatory action to forestall another crisis of such severity. While excessive risk taking by financial institutions is summarily consigned the greatest blame, one must be mindful that even the most meticulously planned preventive measures for loss control buckle when assets cannot be sold within a foreseen range of prices. However, equal in importance to prudential risk taking is the set of constraints designed to limit deviations from it. In this regard, we must consider the ways in which liquidity regulation in previous years was too lax or perhaps allowed circumvention; shortcomings that now require undivided attention.

Key findings

• Preceding Regulations – A divided response was received on the laxity of foregoing liquidity regulations. Although there may have been exceptions, one cannot generalize them as inadequate. The FSA leads the way in introducing updates.

• Liquidity of Sovereign Debt – In light of rising debt to GDP levels in developed nations and fiscal woes afflicting countries such as Greece, sovereign default is a serious concern.

• Unintended Consequences – Considering the high preference regulators have shown towards government debt, the interviewees fear that cheap credit may proliferate and potentially feed asset bubbles.

• The Future of Regulation – While there are regulatory disparities across the globe, convergence is expected in the future. Nevertheless, regulatory arbitrage is still not inconceivable. 

• Liquidity Risk and Technology – In-house software is widely used in liquidity risk management. However, regulators are expected to be more intrusive in the interpretation of output and regulatory compliance.

Conclusion

Given the remarkable severity of the credit crisis, an overarching review of regulation was not unforeseen. What makes this time slightly different is the urgency with which regulators seek to address liquidity management and the exacting nature of proposed reforms. But as regulators scramble to mend any shortcomings, perhaps their enthusiasm will gestate the twin spectres of sovereign risk and asset price bubbles for risk managers to equip against in the future.

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