Global Financial Crisis

Bank liquidity risk is the risk of not having sufficient funds to meet payments such as those arising from unexpected changes in customers’ withdrawals or loan draw-downs (Gup, Avram, Beal, Lambert&Kolari, 2007). Liquidity risk can be measured using simple liquidity ratio or dynamic liquidity ratio. “Simple liquidity ratio is calculated by first identifying the bank’s liquid assets and then expressing this as a percentage of its total assets” (Gup et al., 2007, p.356). It only considers asset liquidity, and this measure is only one point in time. However, dynamic approach compares projected liquidity needs with projected available liquidity (from both asset and liability sources) for each time period. “This approach is superior to focusing on one or the other parts of the liquidity problem because it evaluates liquidity relative to bank needs” (Gup et al., 2007, p.356).

APRA is proposing that banks in Australia hold more liquidity in the event of future crisis. The reason for this is “APRA noted that the financial crisis exposed the limitations of existing liquidity reporting rules when markets are under severe stress” (Baltazar, 2009, para.8). APRA (2009) said the financial crisis has highlighted the need for ADIs to have adequate levels of liquidity and robust liquidity risk management systems, and has provided considerable insights into better practice in this area. APRA supports the Basel Committee’s measures and agrees that greater international consistency in prudential regulation, promoted by the Leaders of the G20, will strengthen Australia’s prudential framework.

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. It is an important source of liquidity for banks. A typical example of securitization is a mortgage backed security (MBS), which is a type of asset backed security that is secured by a collection of mortgages (“Investopedia,”2010).

The...