“Addressing concerns about market liquidity” – Director of Policy & Risk, Gerry Cross

• Important to have markets that work effectively in both good times and bad times
• Continued evaluation of the effectiveness of regulatory reforms is important but will take time
• The mispricing of liquidity risk was one of the failures that led to the financial crisis
• Liquidity risk in the investment funds sector needs to be well understood

Speaking at the 4th Annual Liquidity & Funding Risk Conference in London, Director of Policy & Risk, Gerry Cross, examined whether market liquidity is changing.

He said that “It is important that we have markets that work effectively and well in both good times and bad times.  And in particular that they are resilient to periods of significantly heightened risk and dislocation.”  Adding that “the picture is not straightforward, because there are different types of resilience and fragility and different modes of stress.”

In relation to the possible impact of regulation on market liquidity Mr Cross cautioned “It is of course important that with the passage of time we assess as fully as possible the impact and any unintended consequences of the regulatory reforms.

"The mispricing of liquidity risk was one of the failures that led to the financial crisis.  Regulation designed to address this failure, amongst others, should not be judged on the basis of divergences from immediate pre-crisis benchmarks.

“We need to continue to work to understand well the cumulative impact of recent regulation.  We believe that this is a long-term rather than a short-term project – though of course where clear weaknesses are identified these should be addressed.  On the whole we think that it is too early to judge fully the effects of post-crisis regulation and we must avoid any erosion of the hard won benefits that have delivered very important stability improvements.”

Concerning liquidity risk in the investment fund sector, Mr Cross noted the importance of developing a strong understanding of the specific features of this sector and its linkages with the rest of the economy.  Developing harmonised liquidity risk tools, a high-quality, bottom-up approach to stress testing, and improved data gathering is essential.