22 Jun International Banking Management
International Banking Management
What are the characteristics of Macquarie bank and how does it operate?
Main issue: How does Macquarie Group Australia (Macquarie bank) manage liquidity risk? What problems would occur in dealing with liquidity risk? Are there any differences in dealing with liquidity risks from commercial banks?
Questions should be linked with Basel II and Basel III and those readings of liquidity.
Recap06 — Liquidity Returns
We started our first lecture with a discussion of how banks transform deposits, which to depositors are instantly available at face value, into assets with longer maturities and lower creditworthiness. This transformation means that banks are intrinsically unable to meet the demands of depositors if, on a given day, every depositor demands his or her money back. If depositors get nervous about this fact, the depositors run to the bank to be first in line to withdraw, and thats precisely what causes a run on a bank.
In the next lecture, though, we noted that most runs on the bank are triggered NOT by timing issues, but by the perceived inability of a bank EVER to honour its deposits. This occurs when the risky assets on the banks balance sheet suffer losses, and the assets of the bank drop below the level of its liabilities. The only way a bank can withstand losses and still pay liabilities is to hold capital, which can be written down if losses occur.
This became the focus of the next two lectures, when we discussed the first efforts of the Basel Committee on Banking Supervision to hold internationally active banks to a minimum capital standard. We then saw how Basel II evolved in response to what we later saw as the naivety and arbitrariness of Basel I. Finally, we examined the Basel III capitalinitiative, which over the next six or seven years puts into place standards for more and better capital.
(Note that Basel II replaced Basel I, keeping only the concept of risk-weighted assets. Basel III didnt replace Basel II, because the entire mechanism — all three pillars — of Basel II are still in effect. Thus in a perfect world, maybe we should call Basel III “Enhancements to Basel II”. Too bad that name was already taken, when the Basel II risk-weights were increased for the types of investments which caused all the grief during the GFC.)
The Basel III Liquidity Initiative
In the lead up to Basel III, the BCBS examined how liquidity risk should be incorporated into the same process which is uses to price and manage interest-rate risk. (“Liquidity Risk: Management and Supervisory Challenges” (February 2008) and “Principles on Sound Liquidity Risk Management and Supervision” (September 2008).) The Basel III liquidity initiative “International framework for liquidity risk
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