Basel Committee on Banking Supervision liquidity risk framework and ratios
This comment piece examines the Basel Committee on Banking Supervision (BCBS) liquidity risk framework and liquidity ratios. It features a brief overview of regulatory requirements, followed by FRSGlobal’s analysis of the regulation, considering some of the likely market impacts. The comment piece concludes with how FRSGlobal’s solutions can help firms to incorporate the required liquidity ratios.
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On 12 September 2010, the group of governors and heads of supervision (the oversight body of the Basel Committee on Banking Supervision) fully endorsed the agreements it reached on 26 July 2010 including the introduction of global liquidity standards which are based on the released consultation paper entitled “International Framework for Liquidity Risk Measure, Standards and Monitoring” in conjunction with September 2008 paper “Principles for Sound Liquidity Risk Management and Supervision”. The finalised rules were published in the document “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010 by BCBS.
The BCBS framework includes two new measures to capture firms’ liquidity status.
- Liquidity Coverage Ratio (LCR)
- Net Stable Funding Ratio (NSFR)
After an observation period beginning in 2011, the liquidity coverage ratio (LCR) will be introduced on 1 January 2015. The revised net stable funding ratio (NSFR) will move to a minimum standard by 1 January 2018. The committee will put in place rigorous reporting processes to monitor the ratios during the transition period and will continue to review the implications of these standards for financial markets, credit extension and economic growth, addressing unintended consequences as necessary.
