A little over a year ago, I discussed the progression of BCBS 188: Basel III: International framework for liquidity risk measurement, standards and monitoring and how financial institutions must handle this challenge. Fast forward to April 2014, and the debate is still going strong – are we any closer to being prepared and incorporating this into our daily risk lives?
Regional jurisdictions took a closer look at the Basel regulation, and have determined how they will address this. The US has taken an aggressive approach when compared to other regions. They have tightened “supervisory expectations in ways that will compel banking companies to address fundamental aspects of liquidity risk management, including stress testing, integration with capital planning, and data collection.” The Basel committee finalized their standard on the Liquidity Coverage Ratio back in January 2013, but also recently set out in January 2014 the ratio’s disclosure requirements.
Given the severity of the recent liquidity crisis, the US has placed greater emphasis on how banks manage their liquidity risk and consequently have taken a more draconian approach, by way of constraining what can be deemed ‘high-quality liquid assets’, (leaving USD billions of PSE issued securities on the shelf because they are deemed ‘not liquid’ enough) being more conservative on the treatment of cash inflows and outflows. Although the requirement won’t be finalized for at least another year, you can expect stern industry resistance, to what in effect will put a dent in banks’ bottom line and erode overall shareholder value.