The Banking and Strategy Initiative

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Residential Mortgage securities added back to the Liquidity mix | Banking Insight

In a set of amendments that are likely to be a defining point for bank reform in the rest of the decade, the recovery in housing  was likely also bolstered by a little consideration by Basel in finalising overarching requirements for short term bank liquidity from banks. The to be launched Liquidity Coverage Ratio was likely to be a big spanner hovering on banks’ blueprints but was made pliable over the weekend by including Residential Mortgage Backed Securities rated AA or higher in the basket of securities counted as Cash ( High Quality Liquid Assets) for the purpose of calculating a minimum 100% availability of such for the next 30 days’ cash outflows. Cash outflows however are netted by inflows only to the extent of75% meaning that the new standard will still require banks to keep such higly liquid securities at every time avaiable as required for cash outflows except for overuse during a financial emergency. The earlier high quality liquid assets list also did not include A- to BBB-(junk+1) rated corporate debt and unencumbered equities , both now included with a 50% haircut in the 15% sub limit called Level 2B assets

Rating requirements have been softened to included local ratings and allow certain commercial paper tranches clearing the way for banks to more easily substitute for currently overarched dependence on buying and selling other banks ‘junk’ secondary debt for liquidity every other week. Central Banks would also be allowed to lend a hand to bank liquidity if they so desire for the HQLA designation to be applied to selected Central Bank reserves

English: Development of balance sheet total of...

English: Development of balance sheet total of the Eurosystem (i.e., The European Central Bank and the central banks of the countries using the euro. Used on Kredietcrisis. To be updated regularly. Theoretically, this could be updated weekly, but I don’t think I’ll manage that. Data obtained from the ECB website, Statistical Data Warehouse, search query ILM.W.U2.C.T000.Z5.Z01. (Photo credit: Wikipedia)

On the other side of the ratio as well, Outflows counted on Fully insured retail deposits have been reduced by 40% and the outflows on fully insured deposits from non financial companies, governments, central banks and PSUs also halved. Other non operational depositss from such will now attract a 40% outflow rate instead of 75% while the drawdown rates on committed liquidity facilities have been marked to less than 1/3rd of the approved facilities. interbank liabilities will be counted 40% towards the Outflows to be matched instead of 100% That all these outflows can still be matched by inflow s of up to 75% of outflows is the final step in determining the still substantial liquidity capital to be provided by banks every month excluding secured derivatives and trade finance liabilities of not more than 5% as well as funding transactions with Central Banks

The new Calendar expects Banks to count a 60% LCR from s2015 stepping up to 100% in 4 years i.e. 2019

Meanwhile discussions on the Banking Union have been stymied despite the reduction in the number of banks to be supervised by the ECB and even after such a Union is created, a separate set of inter bank regulations would be required to enable Central funding of the Union and thus preclude any new sovereign bailouts to the periphery or FRance though the final concession to GReece and Spain earlier standing as guideline make it a trivial issue and may delay thus any discussions of the Union well into the summer at A




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This entry was posted on January 7, 2013 by in Financial Markets.


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