The oversight body of the Basel Committee on Banking
Supervision - The Group of Governors and Heads of Supervision
(GHOS) - pleasantly surprised banks on the onset of the New Year
by delaying the implementation of new liquidity rules with full
effect by four years. These rules, imposed by the Basel Committee
in 2010, required banks to hold adequate cash or liquid assets in
hand to withstand another financial crisis.
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With certain amendments, the Liquidity Coverage Ratio (LCR) will
be introduced on January 1, 2015, as planned earlier. However,
the GHOS announced that it would be subject to phase-in
arrangements, aligning with the Basel III capital adequacy
requirements. Notably, the minimum requirement of LCR will begin
at 60%, with an annual increase of 10% to reach 100% on 1 January
The committee has also amended the range of assets, which banks
can use as a buffer. These include shares and retail
mortgage-backed securities (RMBS) along with lower rated company
bonds acting as the cushion.
The step has been taken to build up cash position and help
stimulate economic growth with the use of banks' reserves.
Moreover, such moves will restrict shrinking loans by banks,
which took in effect to abide by the rule.
Complying with stringent regulations is not a major concern for
most of the global banks including
Wells Fargo & Company
HSBC Holdings plc
JPMorgan Chase & Co.
), but it would be difficult for the banks to optimize business
investments. Thus, banks will need to reassess and restructure
their operating models to be successful, which are expected to
take considerable time.
The introduction and acceptance of Basel III standards
illustrates the fact that the industry has been adopting tougher
regulatory measures to prevent the recurrence of a global
financial crisis and restore public confidence.
According to GHOS, LCR stands out as a main factor in the Basel
III framework. Determination of a truly global minimum
standard for bank liquidity has been achieved for the first time
in regulatory history. Such moves by the committee assure that
the new liquidity standard will not thwart the ability of the
global banking system to rejuvenate recovery.
Overall, a key determinant for a quick recovery will be the
quality of risk analysis and risk-awareness in decision-making
and incentive policies. Thus, we believe that accumulating larger
capital buffers over the cycle and reducing pointless complexity
in the business is crucial to the performance by the banks going