Milestone: Basel III Liquidity Reprieve Welcomed By Most


By Luca Ventura

“For the first time in regulatory history, we have a truly global minimum standard for bank liquidity,” announced the head of the Basel Committee on Banking Supervision, Bank of England governor Mervyn King, during a news conference in Basel, Switzerland, in January.

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King called the LCR agreement “historic.” However, not all agree that it is stringent enough


King called the agreement on the new rule “a very significant achievement,” and rightly so. Throughout 2012, Basel members had failed to find common ground on the required liquidity coverage ratio, or LCR, which is the quota of cash and highy salable assets held by financial institutions in order to face a 30-day credit crisis.

The measure approved last month is substantially more flexible than the draft version published in 2010 and originally planned to take effect on January 1, 2015. Under the new rule, banks will be expected to hold just 60% of the total buffer, gradually increasing by 10 percentage points each year to reach 100% by January 1, 2019. The current guidelines also widen the range of eligible assets, including some equities and high-quality mortgage-backed securities.

Endorsed unanimously by central governors and financial regulators, the new standard was generally welcomed by the market. A key component of Basel III, the LCR is designed to avoid a repeat of the 2008 bank collapses.

Banks argued that the draft version would have constrained their ability to lend, but some market watchers felt it was not strong enough and that this dilution will just weaken it further.

However, Anat Admati, Stanford professor of economics and co-author of the forthcoming book The Bankers’ New Clothes , sees the agreement on the coverage ratio as a much-needed breakthrough: “The crisis has shown that market liquidity can fail exactly when it is needed. Mortgage securities, in particular, failed to provide reliable liquidity.” Most importantly, continues Admati, “by reducing solvency concerns, stronger and more effective equity (so-called capital) requirements would reduce the likelihood of liquidity problems and make them easier to solve.”