Rethinking Bank Liquidity: Measurement, Regulation, and Policy Trade-Offs

In this Public Discussion Note on "Rethinking Bank Liquidity: Measurement, Regulation, and Policy Trade-Offs," Prof. Andreas Fuster, SFI Senior Chair and Associate Professor of Finance at the École Polytechnique Fédérale de Lausanne, and Dr. Lucas Marc Fuhrer, Head of Interest Rate and Liquidity Risk Management at PostFinance and Lecturer at the University of Zurich, provide a concise overview of how bank liquidity is measured and regulated, the lessons from recent episodes, and how liquidity risks may evolve going forward, along with their perspective on current policy debates.

The authors highlight the central role of liquidity transformation in banking, enabling banks to provide significant value to the economy while simultaneously exposing them to runs. They examine how this inherent fragility is addressed through banks' liquidity management and regulatory requirements such as the Liquidity Coverage Ratio (LCR), while noting that such requirements, although they have significantly strengthened banks' resilience, cannot fully insure against all forms of liquidity strain.

Drawing on recent episodes, including the 2023 failures of U.S. regional banks and the collapse of Credit Suisse, the Note emphasizes how rapidly liquidity stress can materialize, especially in an environment shaped by digital banking and concentrated depositor bases. Looking ahead, the authors discuss how liquidity risks may evolve further with instant payments and new forms of digital money.

On policy, the authors argue for a balanced and forward-looking approach, as all measures come with benefits and costs, and their interactions need to be considered. Strengthening liquidity requirements may enhance resilience but can also raise funding costs and curb credit availability. New central bank facilities, such as the SNB's Extended Liquidity Facility (ELF), need to be carefully designed to support rather than replace market funding, while also attempting to reduce the stigma associated with their use. Expanding deposit insurance could reduce the risk of bank runs but would need to be credibly financed. Finally, private-sector mechanisms can redistribute surplus liquidity within the system and help limit the public-sector footprint, but they require the right circumstances.

Overall, the Note emphasizes that eliminating liquidity risk is not possible while allowing banks to play their key economic role. Rather, the goal is to manage risk more effectively in a constantly evolving financial system.

Read the SFI Public Discussion Note in English
Versions of this SFI Public Discussion Note in French, German, and Italian will be published by the end of April 2026.