Work on the Liquidity Coverage Ratio finalised by the Basel Committee
12 January 2014
In January 2013, the Basel Committee's oversight body, the Group of Governors and Heads of Supervision (GHOS), agreed the final form of Basel III's Liquidity Coverage Ratio (LCR). At that time, the GHOS asked the Committee to undertake some additional work on liquidity disclosure, the use of market-based indicators of liquidity within the regulatory framework, and the interaction between the LCR and the provision of central bank facilities. The Committee has completed this work, and has today published a package of material that responds to these requests.
The Committee has today issued final requirements for banks' LCR-related disclosures. These requirements will improve the transparency of regulatory liquidity requirements and enhance market discipline. Consistent with the Basel III agreement, national authorities will give effect to these disclosure requirements, and banks will be required to comply with them, from the date of the first reporting period after 1 January 2015.
The Basel Committee also published today Guidance for Supervisors on Market-Based Indicators of Liquidity. This document was published to assist supervisors in their evaluation of the liquidity profile of assets held by banks, and, for the purposes of Basel III's LCR, to help promote greater consistency in High Quality Liquid Assets (HQLA) classifications across jurisdictions. Importantly, the guidance does not change the definition of HQLA within the LCR; rather, it helps supervisors assess whether assets are suitably liquid for LCR purposes.
Finally, the Committee agreed to modify the LCR's definition of HQLA to provide greater use of Committed Liquidity Facilities (CLFs) provided by central banks. The use of CLFs within the LCR has until now been limited to those jurisdictions with insufficient HQLA to meet the needs of the banking system. The Committee has agreed that, subject to a range of conditions and limitations, a restricted version of a CLF (an RCLF) may be used by all jurisdictions.
Whether jurisdictions choose to make use of RCLFs is a matter of national discretion. Importantly, central banks are under no obligation to offer such facilities. Furthermore, the restrictions agreed by the Committee are intended to limit the use of RCLFs in normal times, and therefore maintain the principle that banks should self-insure against liquidity shocks and that central banks should remain the lenders of last resort. These restrictions may, however, be relaxed during times of stress, when HQLA might otherwise be in short supply.
The text that incorporates the RCLF into the LCR framework is provided the Annex.