On September 3, the FDIC, the Fed, and the OCC finalized the Liquidity Coverage Ratio rule to strengthen the liquidity positions of large financial institutions. The rule will for the, first time, create a standardized minimum liquidity requirement for large and internationally active banking organizations. Each institution will be required to hold high quality, liquid assets (HQLA) such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the firm’s liquid assets to its projected net cash outflow is its “liquidity coverage ratio,” or LCR. Final Rule.
liquidity coverage ratio
Basel Committee on Banking Supervision Endorses Revised Basel III Liquidity Standards for Banks
It was announced on January 6, that the Basel Committee on Banking Supervision’s (BCBS) Group of Governors and Heads of Supervision (GHOS) has endorsed revised Basel III liquidity standards for banks. This was later welcomed in a statement made by Michael Barnier of the European Commission on January 8.
The revised liquidity standards relate to the formulation of liquidity coverage ratio (LCR), which is an essential part of the reforms being made by Basel III. The package of amendments, which is summarised in a document headed Annex 1, comprises of four elements as follows:
- revisions to the definition of high quality liquid assets and net cash outflows;
- a timetable for phasing in the standard;
- a reaffirmation of the usability of the stock of liquid assets in periods of stress (including during the transition period); and
- an agreement that the Basel Committee will conduct further work on the interaction between the LCR and the provision of Central Bank Facilities.
In addition to the revised liquidity standards, the GHOS also reiterated the importance of full and timely implementation of the Basel III standards. It also endorsed a new charter for the BCBS in order to enhance understanding of its activities and decision-making processes, and identified that a review of the net stable funding ratio would also be a priority over the next few years.