Update on Basel III:
Today after emphasizing that the views in the presentation are his and not those of the Federal Reserve Bank of New York, Marc Saidenberg gave a presentation entitled “Basel III – Inside the New Provisions for Liquidity Management and Regulation.” The following is a brief summary of his talk surrounding the background and objectives of the new provisions:
Basel Committee is seeking to promote financial stability by addressing two complementary objectives:
- Enhance resilience of Financial Institutions to short-term, acute shocks to funding by requiring minimum pool of liquid assets institutions must hold.
- Effect longer-term structural changes in liquidity mismatches by requiring firms to finance more assets and activities with “core” or stable funding.
Two measures of liquidity risk developed to be implemented as minimum regulatory standards for internationally active banking organizations:
- Liquidity coverage ratio (LCR) – risk sensitive scenario-based measure to size a minimum pool of high-quality liquid assets.
- Net stable funding ratio (NSFR) – structural measure that compares estimate of ‘reliable’ funding sources to estimate of required stable funding.
Transitional arrangements for liquidity standards include:
- Introduction of LCR on 1 January 2015 and NSFR on 1 January 2018.
- Both standards will be subject to an observation period to ensure they do not result in unintended consequences.
(Stay tuned for my next update on other subjects from the RiskMinds conference.)