The liquidity link

Liquidity risk management has become a major focus for banks since the market turbulence of last year. Despite a widely held view that economic capital should not be directly tied to liquidity risk, Bob Allen argues banks should take this into account in their economic capital calculations

In August 2006, Risk published an article in which I argued for the inclusion of liquidity risk as a potentially material contributor to unexpected losses requiring economic capital support (Stemming the flow, Bob Allen, Risk August 2006). This was not a commonly held view at the time. It is worth noting the article did not advocate a specific additional regulatory capital charge for liquidity risk, but focused on the determination of the appropriate amount of economic capital from a