Capital adequacy vs. liquidity requirements in banking supervision in the EU

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The debate on banking supervision over the last decade has largely focused on capital requirements and solvency of financial institutions. The interaction between solvency and liquidity has been much less debated. In this new Policy Brief, CEPS Chief Executive Karel Lannoo and Jean-Pierre Casey, CEPS Research Fellow, discuss the approach to be taken with regard to control of liquidity in the EU. To put the subject into perspective, they first review current developments in financial market liquidity and then discuss the possible impact of the New Basel Accord on the liquidity of financial institutions. The authors further analyse liquidity control in the context of EU financial regulation, and explore whether liquidity control should be harmonised in the EU, and if so, how this could be done.