Basel liquidity standards due in December

In September 2008, the committee published its Principles for Sound Liquidity Risk Management and Supervision, a revised version of a set of 17 guidelines first written in 2000. While the committee expected banks and supervisors to thoroughly implement the revised guidelines, it offered no binding quantitative metrics for liquidity buffers or structural funding.

But a set of rules now being drawn up by the committee's working group on liquidity will create a liquidity coverage ratio as well as quantitative funding requirements. The liquidity coverage ratio would use a risk-sensitive approach, based on a short period of acute liquidity stress, to calculate a requirement for a pool of high-quality assets that banks would be mandated to hold in a liquidity buffer. The supplementary funding requirements would encourage banks to put greater reliance on stable long-term funding for long-term assets, with quantitative constraints on banks' structural funding to be calculated in due course.

Marc Saidenberg, senior vice president in the bank supervision group at the Federal Reserve Bank of New York and co-chair of the working group on liquidity, said that there was a pressing need for quantitative liquidity requirements in parallel with the Basel II capital requirements. 

"The framework the Basel Committee is developing would establish a common set of quantitative liquidity requirements for internationally active firms. There was a view held by many within the Basel Committee and within the Financial Stability Board that the liquidity risk principles should be supplemented with a more effective cross-border approach to increasing liquidity resilience," said Saidenberg. 

Not all supervisors share the desire for binding liquidity rules. "There is definitely a split view among regulators on how liquidity should be managed," said Lars Söderlind, a member of the working group and senior advisor on market and liquidity risk at Stockholm-based regulator Finansinspektionen. "In Sweden we do not have a lot of appetite for regulatory standards - our approach is more qualitative and we believe the most efficient way to ensure sound liquidity risk management is to require greater transparency from banks on stress testing, contingency plans and quantitative information."

But the Basel Committee's liquidity standards are on their way and will be subjected to a period of consultation and quantitative impact study in early 2010. Although there is no firm date for implementation as yet, Saidenberg is confident they will become binding, with some room for national discretion. "There are elements of liquidity risk which are very reflective of jurisdiction-specific characteristics, so the goal is to have a harmonised common standard that allows authorities to implement certain assumptions appropriate to their particular jurisdiction."

See also: Points of principle
Cebs publishes guidelines on liquidity buffers
Agencies aim to unite US with Basel liquidity risk standards

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