US banking: How to fix liquidity regulation
Rethinking liquidity regulation would be better than a regulatory backlash that imposes an even greater liquidity burden on banks. History offers some lessons on how that might be done.
In 2013, the Basel Committee published its vision for the liquidity coverage ratio (LCR), which it described as one of its key reforms “to develop a more resilient banking sector”.
It would work, the committee’s paper explained, by ensuring that banks had “an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meeting their liquidity needs for a 30-calendar day liquidity stress scenario”.
It’s worth reflecting on that original intention in light of the events of recent months. My colleague Peter Lee has written recently about the curious fact that US Treasury bonds – being, these days, both volatile and risky – arguably no longer meet the committee’s own requirements for HQLA, and also about how the 30-day net outflow modelling is likely to need some severe revision to take into account the capacity for deposits to flee much more quickly now.
Add to that the fears that any regulatory backlash might seek to beef up liquidity requirements even further, and there are understandable concerns that banks are going to find their ability and willingness to fulfil their essential function of borrowing short and lending long even more constrained.