Acting Comptroller of the Currency Michael J. Hsu gave remarks on bank liquidity risk at Columbia University Law School in New York on Jan. 18, 2024. Mr. Hsu discussed the characteristics of recent bank runs and lessons learned from recent bank failures. He also discussed a targeted regulatory approach to better classify higher risk deposits, cover acute short-term outflows, and mitigate contagion risk….(read more)

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Acting Comptroller Discusses Bank Liquidity Risk

The Acting Comptroller of the Currency, Michael J. Hsu, recently discussed the importance of managing liquidity risk in the banking industry. In a speech at the Federal Reserve Bank of Chicago, Hsu emphasized the need for banks to maintain sufficient liquidity to withstand potential market disruptions and economic downturns.

Liquidity risk refers to the ability of a bank to meet its short-term financial obligations without incurring significant losses. This risk is particularly important in times of stress, when market volatility and a sudden demand for cash can strain a bank’s ability to meet its funding needs.

Hsu highlighted several key factors that banks should consider when evaluating their liquidity risk. These include the composition of a bank’s funding sources, the maturity and liquidity of its assets, and its access to emergency funding facilities. He stressed the importance of stress testing and scenario analysis to assess a bank’s ability to withstand adverse market conditions.

The Acting Comptroller also emphasized the need for effective liquidity risk management practices. This includes maintaining a diversified funding base, establishing robust risk limits, and ensuring that liquidity risk is monitored and managed at the highest levels of the organization. Hsu also highlighted the importance of effective communication and coordination between a bank’s liquidity risk management and other risk management functions.

In addition to these internal measures, Hsu also underscored the importance of regulatory oversight in managing liquidity risk. He noted that the OCC is committed to implementing strong liquidity risk management standards and conducting regular examinations to assess a bank’s liquidity risk management practices.

Overall, Hsu’s remarks underscored the vital importance of managing liquidity risk in the banking industry. By maintaining strong liquidity risk management practices, banks can enhance their resilience and ability to withstand potential market disruptions. As the financial system continues to evolve, effective liquidity risk management will remain a critical priority for banks and regulators alike.