On 6 January 2013, the Basel Committee finalised new, less onerous liquidity rules, for global banks and large investment firms. In unanimously endorsing minimum standards on the Liquidity Coverage Ratio (LCR), regulators have taken a significant step forward in implementing the Basel III framework. The LCR is the ratio of available liquid assets to the estimated net cash outflow over a 30-day period. It is designed to ensure short-term resilience against liquidity disruptions and reduce the need for banks’ to seek outside liquidity support during a crisis.
Key changes
The Basel Committee have delayed the implementation of LCR from 2015 to 2019. Banks will only need to meet 60% of the requirements by 2015—the previous start date—after which requirements will increase 10% each year until 2019.The new rules expand the range of corporate debt securities that qualify as liquid to BBB-; a big change from its previous stance. As late as September the Basel Committee said that nothing less than AA- should be eligible. Some retail mortgage-backed securities (RMBS) will also count as being “high-quality liquid assets” (HQLAs) under the new regime. Previously, qualifying assets were mostly limited to cash, government debt, central bank reserves and high quality corporate bonds.
The ratio will be smaller under new rules. The new inflow/outflow rules assume a less pronounced withdrawal of bank deposits and a slower loss of income over the 30-day crisis period.
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