Regulation of liquidity in banks

Abstract

Liquidity in banks is like water in a major city: always there when you need it, always plentiful. It is occasionally charged for and sometimes given free. It is usually taken for granted, a type of common good. The banking world is experiencing fundamental changes in matters of liquidity, driven primarily by the regulatory agenda, which will lead to more transparency and higher costs that will ultimately have to be paid for. While transparency is generally good, the combination of the unique role that liquidity plays in the financial system generally, and in its intraday processes in particular, plus a history of opaque costing and imprecise charging, could lead to higher systemic risk and, in the worst case, upending of current business models. While a new equilibrium must result, the road ahead is a tricky one.