The Hong Kong Monetary Authority will consult the banking industry on proposals to revise the liquidity regime in phases before the end of next year, according to Karen Kemp, an executive director of the de facto central bank. 'The current crisis highlights the importance of liquidity risk,' Ms Kemp wrote in the authority's website yesterday. 'This will be a challenging task. But as in the case of implementing Basel II, we are committed to strengthening the liquidity regime, which is another cornerstone for maintaining banking stability in Hong Kong.' She said the HKMA would need to look at liquidity risk in the light of the severe strains experienced by the financial institutions and investment markets amid the current financial turmoil. Banks with sufficient capital normally can obtain cheap funding but the turmoil has made borrowing difficult as financial institutions are reluctant to lend to one another for fear of counterparty risk. 'Even well-capitalised banks can face serious problems if they have not developed the capabilities to manage liquidity properly in an increasingly complex market environment,' she said. Ms Kemp said liquidity risk is a supervisory priority of the HKMA so the authority would study how to ensure the local regulation regime would match the Basel Committee's principles. Under the Basel principles issued in September last year when the financial crisis deepened, banks need to have systems and procedures to identify and measure all liquidity risks. Banks also need to maintain a high level of liquid assets to withstand stress if their normal funding sources dry up and set up a stress test programme for the development of a contingency funding plan. The HKMA has co-ordinated self-assessments by banks to check if they comply with the Basel principles and is analysing the results. 'Our objective is to identify gaps in the authorised institutions' liquidity-risk management and issues that might affect implementation of the sound principles,' she said. 'We recognise the importance of ensuring that banks in Hong Kong are resilient to market-wide liquidity shocks similar to those recently experienced by some of their overseas counterparts. The HKMA is reviewing its liquidity regime.'