Liquidity at Light Speed : Digital Banking and Financial Stability in East Asia and Pacific

Overview & Synopsis

This paper explores innovations affecting finance, specifically by revisiting liquidity risk management in the light of the digital era. It surveys East Asia and the Pacific with a forward-looking approach, drawing lessons from recent global developments. The 2023 turmoil showed that the speed and magnitude of deposit outflows during a banking crisis in the new era may be much higher than expected by banks and regulators - due to a more prominent impact of technology and social media. This suggests that both regulators and financial institutions need to revisit their assumptions about how events will unfold in cases of liquidity stress. These episodes also brought lessons on how policymakers and regulators in various policy areas can work together to preserve financial stability in a coordinated manner. This paper aims to provide insights for policymakers, regulators, and industry stakeholders navigating the dynamic landscape of digital banking, its impact on deposit withdrawal speed, and the changing nature of liquidity management. The paper illustrates, through practical examples, how authorities in East Asia and the Pacific have responded to, and are preparing for, bank runs in the digital era. It also explores the role of integrated policy approaches in strengthening resilience. Differences between how regulatory liquidity measures work in theory and practice are highlighted, noting constraints witnessed on the usability of liquidity buffers, and a targeted recalibration is explored. This is complemented with discussions about liquidity stress tests by reviewing approaches from East Asia and Pacific and assessing the potential for their expansion.