Liquidity risk: what lessons can be learnt from the crisis in Japan’s banking system?

With the need to expel huge amounts of non‐performing loans from their balance sheets, their share prices sinking and their credit ratings lowered, Japan’s banks are struggling to raise new capital and may face collapse. But the current crisis could have been avoided. If they had implemented rigorous liquidity risk management structures, the banks would have a clear view of their true position and could have avoided spinning into the vicious circle of a funding crisis.