## Liquidity and Transparency in Bank Risk Management

_IMF Working Papers, January 18, 2013_

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**Canonical URL:** [Liquidity and Transparency in Bank Risk Management](https://www.imf.org/en/publications/wp/issues/2016/12/31/liquidity-and-transparency-in-bank-risk-management-40258)

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## Bibliographic details
- Authors: Lev Ratnovski
- Published: January 18, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616356774.001

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### Summary of core arguments
- Banks face the risk of being unable to refinance short-term liabilities in case of solvency concerns.
- Two principal management strategies:
  - Accumulate a buffer of liquid assets.
  - Strengthen transparency to communicate solvency to markets.
- Comparative properties of the strategies:
  - A liquidity buffer provides complete insurance against small shocks.
  - Transparency covers also large shocks but imperfectly.
- Incentive and regulatory tensions:
  - Due to leverage, an unregulated bank may choose insufficient liquidity buffers and insufficient transparency.
  - The regulatory response is constrained:
    - Liquidity buffers can be imposed by regulation.
    - Transparency is not verifiable and therefore cannot be imposed in the same way.
  - Liquidity requirements can compromise banks' transparency choices and increase refinancing risk.
- Policy implication:
  - To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

### Key findings and mechanisms
- Liquidity buffers:
  - Provide full insurance against small shocks.
  - Can be mandated by regulators.
  - May have unintended consequences on banks' transparency choices.
- Transparency:
  - Helps communicate solvency and can cover large shocks, though imperfectly.
  - Is not verifiable by regulators, limiting direct regulatory enforcement.
- Interaction effects:
  - Imposing liquidity requirements alone can reduce incentives for banks to adopt transparency, which may increase overall refinancing risk.
  - Effective policy requires combining liquidity regulation with measures that strengthen incentives for transparency.

### Policy recommendations
- Do not rely solely on liquidity requirements.
- Complement liquidity requirements with measures that increase bank incentives to adopt transparency.

### Subjects and keywords
- Subject: Bank solvency, Banking, Hedging, Liquidity requirements, Liquidity risk
- Keywords: bank liquidity, compromise bank transparency choice, liquidity crisis, market failure, WP

*IMF Working Papers — Liquidity and Transparency in Bank Risk Management (Working Paper No. 2013/016)*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/liquidity-and-transparency-in-bank-risk-management-40258_