Relief for Banks as Basel Liquidity Provisions Eased
Central bank supervisors have eased the liquidity requirements under Basel III, which should help cash-strapped banks by freeing up regulatory capital for income-producing purposes.
The Group of Governors and Heads of Supervision (GHOS), the oversight committee of the Basel Committee on Banking Supervision, has amended the Liquidity Coverage Ration (LCR), one of the cornerstones of Basel III, to allow a phase-in which corresponds to that in effect for the Basel III bank capital adequacy requirements.
While the LCR will still be introduced as planned on January 1, 2015, the minimum requirement will begin at 60%, rising in equal annual steps of 10% to reach 100% on January 1, 2019.
The graduated approach is designed to ensure that the LCR can be introduced without disruptions to the banking system.
The GHOS also eased the definition of high-quality assets that count toward the LCR, which form the numerator of the ratio, and the factors that determine the net liquidity outflows that banks would face in terms of stress, which defines the denominator of the ratio.
“Introducing a phased timetable for the LCR, and reaffirming that a bank’s stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery,” said Mervyn King, chairman of the GHOS and governor of the Bank of England, in a statement.
The Basel III proposals for counterparty credit risk contain significant enhancements related to credit valuation adjustment (CVA) and in particular the need to account for variation in CVA with a regulatory CVA value at risk computation.
This computation, disclosed in the Basel III annex, takes into account variations of credit spreads that in turn affects CVA.
Banks are making significant changes to internal counterparty risk management practices.
One of the drivers for CVA desks was the need to reduce credit risk; for example, to free capacity and release reserves, so banks could do more business.
“The Basel III requirements around counterpart exposure in particular require significant amounts of market, trade, counterparty and legal data from across the firm,” said Rohan Douglas, chief executive of Quantifi, a provider of risk analytics. “Big data will become an overused term for banks.”
Regulatory arbitrage “will become increasingly likely as regulations become more complex and the challenges of co-ordination and uniformity become larger”, said Douglas. “The new OTC market regulations highlight this with significant challenges being faced to co-ordinate the different needs and characteristics of the different regions,” he said.
Throughout 2012, the Basel Committee had been examining the comparability of model-based internal risk weightings and considered the appropriate balance between the simplicity, comparability and risk sensitivity of the regulatory framework.
Stefan Inves, chairman of the Basel Committee, said in a statement that “the amendments to the LCR are designed to ensure that it provides a sound minimum standard for bank liquidity, a standard that reflects actual experience during times of stress”.
The Basel Committee will now turn its attention to refining the other component of the global liquidity standards, the Net Stable Funding Ratio, which remains subject to an observation period ahead of its implementation in 2018.
With Adam Conn, Head of Trading, Baillie Gifford
Clients will have the ability to interact with a larger liquidity pool while minimizing market impact.
Buy-side firms can discover liquidity more efficiently and execute on Turquoise.
Appital is also partnering with Turquoise to bring bookbuilding technology to the buy side.
Flowlinx simplifies block liquidity search in emerging and frontier market equities.