The decision to ease the Basel III Short-Term Liquidity Coverage Ratio (LCR) came as a surprise. The announcement on 6 January 2013 by the Basel Committee on Banking Supervision (BCBS) included significant revisions to the original draft published in 2010. While capital requirements for banks and insurers are considerably different, the underlying reasons cited by regulators for amending the rules could be instructive for the Solvency II capital requirements. They also reveal worrying signs that the interaction between banking and insurance regulation is not being properly examined.
Easing the Basel III liquidity rulesBasel III introduced liquidity buffers in response to the liquidity freeze in global financial markets following the collapse of Lehman Brothers in 2008. It specifies the amount and type of capital banks must hold to ensure short-term liquidity, using a 30 day stress scenario. The BCBS’s work programme on the LCR is now complete and paves the way to finalising the next stage of the Basel III Accord – the Long-Term Net Stable Funds Ratio (NSFR), a one year liquidity stress. Together they will be the first set of global liquidity standard for banks. Several changes have been introduced to the LCR since the first draft was published in 2012. They include:
- Definition of High Quality Liquid Assets (HQLA) expanded, subject to higher haircuts and a limit. The new assets (and their associated haircuts) will now include:
- Corporate debt securities rated A+ to BBB– (50% haircut);
- Certain unencumbered equities (50% haircut); and
- Certain residential mortgage-backed securities (MBS) rated AA or higher (with a 25% haircut).
- A phasing in of the new rules. The minimum LCR in 2015 would be 60% and increase by 10 percentage points per year to reach 100% in 2019.
- Complete flexibility on applying the LCR in countries with distressed banking systems.