Liquidity risk

As it appears that the growing problem for Australian businesses is liquidity risk rather than asset quality (eg Centro Properties Group), it is worthwhile looking at the UK Financial Services Authority's Discussion Paper (DP) reviewing liquidity requirements for banks and building societies.

The FSA defines liquidity risk as "the risk that a firm, although solvent in balance sheet terms, does not have, or cannot generate, enough cash to meet its payment obligations in full as they fall due."

The DP re-emphasises the primary responsibility of firms' boards and management for maintaining adequate liquidity and managing their liquidity risk.

The Australian Financial Review reports that APRA is working on a similar review of liquidity rules.