Asia Risk Congress: BIS points to Asian example as evidence new LCR not 'relaxed'

Asian regulators' only partial recognition of the new criteria of acceptable liquid assets that can be included in the liquidity coverage ratio counts as a rebuff towards those who saw the new standards as a relaxation of the initial 2010 LCR, says Jeff Miller, senior financial sector specialist, Asia and the Pacific, at the Bank for International Settlements (BIS).

In January, the Basel Committee on Banking Supervision published a revised text on the liquidity coverage ratio, a requirement that banks have sufficient liquid assets to cover net cash outflows over a 30-day period under stress. In the new LCR, an additional level of eligible assets was added, called level 2B.

These included residential mortgage-backed securities (RMBS) with a long-term credit rating of AA or higher, corporate debt securities with a long-term credit rating between A+ and BBB–, and certain listed non-financial equities. The key outlier, however, was that unlike the highest-quality assets such as AAA sovereign bonds, inclusion in nationally implemented LCRs was at the discretion of the regulators.

Speaking at the Asia Risk Congress event in Hong Kong yesterday, BIS's Miller said that, far from being a relaxation of standards, the new LCR was merely a reflection of actual market experience.

"In January this year, the committee released a final rules text. The overall framework was unchanged, revisions were introduced in a number of areas. A lot of commentators referred to the framework’s revisions as a relaxing of the original standard. It is true that the overall impact was positive from banks’ perspectives, but the motivation for the changes was to better reflect actual experience in times of stress," he said.

The motivation for the changes was to better reflect actual experience in times of stress

"The timing of the original text was at a point when economies and markets were still struggling to recover from the crisis, [and] the committee stressed that both the LCR and net stable funding ratio would be subject to further review and possible revision to address any unintended consequences after an opportunity to assess their impact," he adds.

Actions taken by regulators in Hong Kong, Australia, Singapore and China in their LCR proposal updates this year show that the standards ultimately reflected the concerns from some of the Basel Committee's members.

"Unlike level 1 and level 2A assets in the HQLA pool, standards state explicitly that inclusion of Level 2B assets is subject to national discretion, reflecting the concern of Basel Committee members about the relative liquidity of this new category of assets in times of stress. From a regional perspective, several jurisdictions in Asia have published proposals for domestic implementation of the LCR standard," said Miller.

"I’d like to highlight that all four of [China, Hong Kong, Singapore and Australia] intend to apply the LCR to all of their largest, most sophisticated banks, which would include both domestic and foreign institutions. All four authorities indicate some scepticism about the liquidity of level 2B assets, which is reflected in the limit of recognition of these assets in their proposals," he added.

In its updated proposal released in May 2013, the Australian Prudential Regulation Authority stated it would not consider including level 2B assets, while the Hong Kong Monetary Authority proposed only to recognise single-A rated corporate debt securities and RMBS rated AA or above in its July consultation. In October, the China Banking Regulatory Commission permitted BBB- corporate debt in its new LCR proposal, but continued to exclude RMBS and equities. In August, the Monetary Authority of Singapore also excluded RMBS and equities from its eligible LCR assets and only permitted corporate debt rated single-A and above.