The recent bank failures of Silicon Valley Bank and Signature Bank have shown that liquidity risk can produce a bank failure instantly versus a slower, asset quality-related failure. These liquidity-related failures put a level of fear and panic into the banking industry during a time when the Federal Reserve increased interest rates at an unpreceded pace and magnitude.
The recent actions of the Federal Reserve have quickly reversed liquidity out of the banking system and tightened the level of liquidity across many institutions. Liquidity risk management and contingency funding planning should no longer be seen as a box that needs to be checked off. The recent bank failures, the reduction of on-balance sheet liquidity and stiff competition for deposits has made liquidity risk management a priority with the regulators.
