Studies international references to identify, monitor and prevent market and liquidity risks, and analyzes the effect of Basel requirements on the system.
Objective and functions
Analyze standards, current and pending regulations, guides, recommendations and manuals from internationally recognized organizations that serve as a reference to identify, monitor and prevent liquidity and market risks, and analyze the impact on the system of the Basel Committee’s liquidity requirements.
- 01Propose new regulations or changes to existing ones to strengthen the management of these risks across the different types of institutions.
- 02Promote the timely publication of official and reliable information on liquidity and market indicators of the financial sector.
- 03Interest rate risk: periodically determine the effect of rising and falling rates on the different types of institutions.
- 04Price variation risk: follow adverse price movements in the market.
- 05Promote statistical models for measuring and controlling liquidity and market risks.
- 06Propose new tracking and measurement indicators that strengthen risk appetite.
- 07Adapt, from a risk perspective, institutions’ new financial products.
- 08Hold discussions with figures from the public and private sectors.
What market and liquidity risk are
Market risk
Risk of losses in on- and off-balance-sheet positions due to movements in market prices: interest rates, exchange rates, equity prices and commodity prices.
SourceBasel Framework, MAR10: definition of market risk (opens in a new tab)
Interest rate risk in the banking book
Risk that changes in interest rates affect an institution’s economic value of equity and margins because of the mismatch between the maturity and repricing of its assets and liabilities.
SourceBasel Committee (BCBS), Interest rate risk in the banking book, 2016 (opens in a new tab)
Liquidity risk
Risk of not being able to fund increases in assets or meet obligations as they fall due without suffering unacceptable losses. It arises because institutions transform maturities: they raise funds short-term and lend long-term.
How it is measured and quantified
Market and rates are measured with potential loss models and sensitivities. Liquidity, with regulatory ratios and cash flow projections.
VaR and Expected Shortfall
VaR estimates the maximum probable loss over a given horizon and at a given confidence level. The Basel market risk framework published in 2019 uses Expected Shortfall at 97.5% as its central measure, which better captures extreme losses.
Sensitivities
How much the value of a position changes for a small move in a factor: duration and DV01 (change in value per basis point of rate), delta, vega.
Stress tests and backtesting
Extreme scenarios estimate losses outside usual behavior. Backtesting compares actual losses with those the model predicted.
Interest rate in the banking book
ΔEVE and ΔNIIChange in the economic value of equity and in net interest income under rate shocks. Basel uses a drop in economic value of more than 15% of Tier 1 capital as a supervisory alert.
Liquidity Coverage Ratio (LCR)
High-quality liquid assets ÷ net outflows over 30 days ≥ 100%Measures whether the institution can withstand one month of stress with assets it can quickly convert into cash.
Net Stable Funding Ratio (NSFR)
Available stable funding ÷ required stable funding ≥ 100%Measures whether long-term funding is sufficient for the maturity profile of assets and off-balance-sheet operations.
Funding gaps and concentration
Cash flow mismatches by maturity bucket, concentration of depositors and funding sources, and stressed cash flow projections with their contingency plan.
How it is managed
Coordination
Those who lead the committee. The coordination and co-coordination roles rotate once a year.
Coordination
To be appointed
This position is assigned by annual rotation.
Co-coordination
To be appointed
This position is assigned by annual rotation.
Regulations and recommended readings
Standards and documents that the committee uses as the basis of its work.
- Law 183-02, Monetary and Financial Law
- Current regulations from the superintendencies and local bodies
- Basel Committee (BCBS), Principles for Sound Liquidity Risk Management and Supervision, 2008 (opens in a new tab)
- Basel Framework, LCR20: liquidity coverage ratio (opens in a new tab)
- Basel Framework, NSF: net stable funding ratio (opens in a new tab)
- Basel Committee (BCBS), Interest rate risk in the banking book, 2016 (opens in a new tab)
- Basel Committee (BCBS), Minimum capital requirements for market risk, 2019 (opens in a new tab)
- ISO 31000:2018, Risk management: guidelines (opens in a new tab)
- Documents from international agencies
Sign up for this committee
Members who wish to take part notify the Club’s Executive Committee, and this form is the channel. Regular members and representatives of sponsor members may take part. Not a member yet? Find out how to become one.
Connect with our networks