Rbi Report

In: Business and Management

Submitted By urshims
Words 4934
Pages 20
Stress in liquidity is at the heart of any banking crisis in history. During the financial crisis of 2007-09, funding liquidity risk caused the collapse of interbank markets, which became the focus of authorities’ attention at restoring order. Accordingly, central banks and other regulatory bodies world-wide have been evolving prudential liquidity norms in order to impart stability to financial systems. Apart from implementing newer norms on liquidity, they have been devising ways of assessing objectively liquidity conditions in the markets. As an end to this objective, various central banks have started identifying the indicators of liquidity and preparing a composite index thereof in order to have a bird’s eye view of liquidity conditions across financial markets. In this study, a systemic liquidity index (SLI) is constructed considering prevailing rate variables across different financial markets in India. The SLI, so developed, is appropriately validated for its function as a metric for measuring systemic liquidity and its implications on the banks’ performance.

Introduction
“Unfortunately the word ‘liquidity’ has so many facets that is often counter-productive to use it without further and closer definition” - Charles Goodhart (Banque de France, 2008)
The financial crisis of 2007-09 originated in the relatively small subprime lending market of the US, but engulfed the world financial markets very quickly and had devastating effect on the global economy. One of the important characteristics of this crisis was the existence of simultaneous liquidity problems across financial institutions and financial markets spread across many countries. In order to avoid such liquidity problems in future, central banks and international regulatory bodies have initiated a series of policy measures such as introduction of Basel III norms which stipulates more stringent norms…...

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