Speaking note from a press conference following a meeting of the GHOS
Remarks by Mervyn King, Chairman of the Governors and Heads of Supervision (GHOS) and Governor of the Bank of England, at a press conference following a meeting of the GHOS, Bank for International Settlements, Basel, 6 January 2013.
Today marks a good start to the New Year. I am very pleased to announce that the meeting earlier this afternoon of Governors and Heads of Supervision reached a unanimous agreement on the regulation of banks' liquidity through the Liquidity Coverage Ratio. This is a key component of the Basel III Accord. And it completes the work programme that we set out in 2010 with publication of Basel III. The agreement reached today on the Liquidity Coverage Ratio covers four main areas:
- Amendments to the definition of high quality assets that count towards the LCR, which form the numerator of the ratio, and the factors that determine the net liquidity outflows that banks would face in stress, which defines the denominator of the ratio.
- A revised timetable for the introduction of the LCR, which now mirrors the introduction of the capital requirements by coming fully into effect only in 2019. The LCR will be introduced as planned on 1 January 2015. But the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery.
- An agreement that countries with distressed banking systems will have complete flexibility in their application of the LCR until the distress has passed; in other words, a clear public statement that the liquidity buffers defined by the LCR are to be used in times of stress. This is applicable both during the transition and in steady state. There will be no need for banks to hold "buffers on buffers".
- It was also agreed today that, since deposits with central banks are the most (indeed, in some circumstances, the only truly) liquid asset, the interaction between the LCR and the provision of central bank facilities is of fundamental importance. The Basel Committee will therefore continue to work on this over the next year. But today's agreement is a clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks becoming the "lender of first resort".
As in the setting of any new international standard, this was a compromise between competing views around the world. But, in the end, the willingness of the international community to reach agreement over-rode any differences of view about the definition of liquid assets and the appropriate timetable for the introduction of the LCR. This is a very significant achievement. For the first time in regulatory history, we have a truly global liquidity standard for banks.
Now central banks and supervisors can press ahead with the next stage of the Basel III Accord: the Net Stable Funding Ratio. This is a crucial piece in the jigsaw, extending the scope of international agreement to the structure of banks' debt liabilities. This will be a priority for the Basel Committee over the next couple of years.
The Governors and Heads of Supervision also agreed today a Basel Committee Charter. This will improve understanding of the Committee's activities and decision-making processes.
Let me now ask Stefan Ingves, Chairman of the Basel Committee, to say a few more words about the details of the agreement on the LCR before we open the session to questions.
- Audio file of the introductory remarks from GHOS Chairman Mervyn King and the Basel Committee on Banking Supervision's Chairman Stefan Ingves as well as the question and answer session which followed.