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Liquidity risk management practices of selected German credit institutions

In the year 2000, the Basel Committee published the core principles of liquidity risk management (see BCBS (2000)). Although the majority of credit institutions still take these core principles into account when implementing their liquidity risk management strategies and these principles are still considered to be good practice, the underlying conditions of the liquidity management approaches of banks have since undergone significant changes.

Not only have structural changes on the financial markets made it necessary to develop more efficient and effective risk management approaches, banks' risk management strategies also have to be adjusted to take account of changes in the behaviour of market players, the increasing complexity of financial relationships in general, product innovations and technical developments, such as trading, processing and payment systems and the increasing speed and volatility of payment flows.

Both the banking supervisory authorities and the financial industry itself are placing greater emphasis on the need for efficient and reliable liquidity risk management systems. Many institutions are already managing liquidity risks by using complex internal risk measurement and management techniques which generally go beyond the supervisory reporting requirements.

During 2007, the Deutsche Bundesbank and the Federal Financial Supervisory Authority (BaFin) examined the liquidity risk management practices of selected German credit institutions. The paper entitled “Range of practices” provides an overview – in an anonymised form – of the most significant elements of the liquidity risk management systems of the largest banks/banking groups operating in Germany.