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Major banks make progress on liquidity standards

28 February 2017


Liquidity requirements LCR and NSFR are being phased in globally

Read more: liquidity securities finance Basel III

Most major banks have sufficient lines of liquidity in place to meet two key ratios according to the latest Basel III monitoring report.

Figures published this week show that 87.9% of large international banks already met or exceeded the final LCR minimum requirement at the end of June last year.

LCR, short for the liquidity coverage ratio, was introduced see whether a bank could survive a 30-day liquidity shock set at a fairly extreme level.

It requires banks to maintain a stock of high-quality liquid assets (HQLA).  

A ratio of 60% was set in 2015, increased to 70% in 2016 and will continue to rise in equal annual steps to reach 100% in 2019.

The gradual phase-in has led to an increase in various types of structured transactions to help extend short-term cash-flow projections beyond the prescribed regulatory metrics.

Securities lending with maturity terms, collateral upgrades and swaps transactions are among them.

The second liquidity standard, NSFR, is a longer-term structural ratio that addresses liquidity mismatches and provides incentives for banks to use stable sources to fund their activities.

Banks have until the start of 2018 to meet the NSFR standard. The proposed US rule has same January 1 effective date.

In its latest report, the Bank for International Settlements (BIS) said that 84% of major banks already exceeded the 100% ratio with a weighted average NSFR of 114% at the end of June.

The aggregate NSFR shortfall for major banks below the 100% NSFR requirement was €108.6bn compared to €234.5bn in December 2015.

Last year the ICMA said impact of the NSFR, if simply adopted exactly as outlined by the Basel Committee, would create significant additional stress and weaken the effectiveness of the repo market; and, given their interwoven relationship, the collateral market.

Netting of repo and reverse repo for purposes of the NSFR has been an area of ambiguity since the NSFR was first proposed.

Earlier this week the Basel Committee issued the second set of frequently asked questions and answers on NSFR providing some clarity by  approving netting of securities financing transactions in certain circumstances.


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