Homeopathic regulation January 7, 2013 at 2:47 pm

The new revisions to the Basel III LCR do not, of course, water it down to homeopathic quantities, but I love the phrase so much I wanted to use it nonetheless.

Basel proposes:

  • the definition of high quality liquid assets (HQLA) has been expanded to include lower-rated corporate bonds (A+ to BBB-);
  • certain equities with 50% haircut
  • as well as certain RMBS rated AA or higher with 25% haircuts.
  • The aggregate of these additional assets are subject toa limit of 15% of the HQLA.

The Basel Committee has also agreed to a timetable for phase-in of the new standard. Banks’ LCR will need to reach 60% in 2015, increasing by10% p.a. until 2019, instead of a 100% requirement in 2015.

My snap judgement is that this can probably be met by most banks in the current liquidity environment. Whether it will act as a constraint later is less clear.

2 Responses to “Homeopathic regulation”

  1. “homeopathic” – nope, not exactly what comes to mind…

    (I deleted all my immediate cynical vitriol – not homeopahtic enough…:-))

  2. p The good news is an expectation that the ratio can go below 100% during stress. Commentary seems to have focused on it being a big dilution but as an example to the contrary, the new Level 2B assets are subject to strict qualification criteria, haircuts of up to 50% and even then can only be included if the national regulator says ok. So free lunch it ain’t.

    What I found a bit odd was the reduction in outflow factor on undrawn commitments to other banks, from 100% to 40%. Surely in a liquidity stress the first thing banks will do is draw down stuff like that in full? It leaves the door open to an unfortunate channel of contagion.

    Big picture, even if the LCR changes are worth the c20pp Ingves said they are in the press conference, I wonder whether Basel are planning something less appealing for leverage, which is close to the Chairman’s heart, also addresses misgivings on risk weights and the real detail of which is often glossed over by analysts (eg not bothering to include off balance sheet exposures)?