Liquidity Standards for Banks

The International banks rejoiced when the regulator announced the first ever global liquidity standards, after New Year. The regulator announced that the liquidity standards will be less onerous than expected and will also not be fully implemented until 2019, which is 4 years late than the general expectation. This was quite contrary to the expectations of the international banks. The announcement was the perfect New Year gift to the international banks as it helped them lower the prevailing liquidity concern in the banking industry.

Liquidity Coverage Ratio

To prevent another 2008 bank collapse, the “liquidity coverage ratio” or the LCR marks for the first time that global regulators have sought to require individual banks to hold enough cash and easy-to-sell assets, to allow them to survive a short-term market crisis.

This liquidity measure is nothing but the second critical point of the Basel III norms for the banking environment. The new capital requirements was implemented in the month. But adding curiosity for the bankers, it was said that the final rule about the Basel III norms after due approval from the BCBS or the Basel Committee on Banking Supervision, will be more flexible than its draft version which was released over two years ago.

Throwing more light on the final guidelines about liquidity and other aspects of Basel III norms, it was said that the banks will now be able to count a much wider variety of liquid assets towards their buffers. This would include a portion of equities and high-quality mortgage-backed securities as well. The calculations measure have been changed significantly to improve on transparency and better and faster implementation. Also the change in calculation has resulted in reducing the total size of the liquidity buffers, which is required by the institutions to hold against outflows from possible depositor runs and corporate and interbank credit lines.

Effect of the new Liquidity Standards on the Banking Industry

The announcement of such guidelines gave a new energy to the industry, as the announced reforms are very favorable to the industry and definitely flexible. Changing asset definition and calculation measures has been on the most sought after changes to be implemented by the committee. The agreement is a very significant achievement which gives a proper and clear commitment to ensure banks liquidity. This move will prevent bank to go to central bank and would also prevent the central banks from becoming lenders of first resort.

Basel committee currently consists of members from 27 participating nations and include the top most official of the central bank of the countries. In the meeting, which was conducted way back in 2010 to draft the buffer guidelines, it was decided that financial instruments like government bonds and top-quality corporate bonds will only be counted towards the buffer. The decision came as a major setback for the banks as it would tie banks too closely to sovereign debt and constrain their ability to lend to the wider economy. But the recent agreement by the committee to count on some equities, corporate bonds rated as low as BBB- and top-quality mortgage-backed securities, resulted in a positive energy for the banking industry.

Read more about Top Ten Banks in India.

Conclusion

It is expected that the change would effectively increase the LCR (average) for the world’s 200 largest banks. Also it is seen that currently the liquidity stocks are not evenly spread due to which some of the institutions remain well below the required level of liquidity. This made the committee allow relaxation of the implementation of the guideline to the tune of 60% in 2015, which needs to be completed fully by 2019.

Lastly, the result is a surely a good news for bank profits as the institutions will be allowed to count more, higher-yielding assets in their liquidity buffers. The national regulators can also allow relaxation in the rules during crisis so that institutions need to hold “buffers on top of buffers” making the system effective and easy.

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