At the front of everyone’s mind at the moment is liquidity, or the lack of it, and its impact on the UK, European and global economies. Basel III introduces a new liquidity framework, initially for observation only, to complement the increased capital requirements for the banking industry. The development of new liquidity rules will potentially have a large impact on banking business models.
The Basel III Liquidity Coverage Ratio (LCR) will require banks to hold a 30 day liquid buffer consisting largely of sovereign debt, supplemented with up to 40% of “level 2” liquid assets. In addition, the Net Stable Funding Ratio (NSFR) will set out requirements for a medium term liquidity buffer. An observation period relating to the LCR will commence in 2011 ahead of the full application of the regime from 2015, while the NSFR will become a minimum standard in 2018. The Basel Committee on Banking Supervision (BCBS) announced in January 2012 that it will work to address some specific concerns in relation to LCR and publish its recommendations by the end of the year. In the EU, the LCR and NSFR are to be implemented through Capital Requirements Directive IV (CRD IV). The EC CRD IV proposal (see also capital section for more information on CRD IV) proposes a softer stance on liquidity during the observation period than Basel III. The approach proposed by the EC is to focus more on the reporting of liquid assets and stable funding sources during observation and consider the outcomes and options following observation, as opposed to advocating binding ratios from the outset. The definition of what constitutes a liquid asset will be prepared by the European Banking Authority (EBA).
The Financial Services Authority (FSA), which published its enhanced liquidity regime in October 2009, is expected to look again at the details and timing of the UK regime once the EU proposals on implementing minimum global liquidity requirements are finalised.