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Basel Committee revises liquidity standard for banks

The Group of Governors and Heads of Supervision (GHOS), the governing body of the Basel Committee on Banking Supervision, has endorsed the amendments to the Liquidity Coverage Ratio (LCR) as a minimum standard.

This endorsement will ensure that banks hold sufficient liquid assets in order to prevent central banks from becoming the lender of first resort.

The regulators have also widened the definition of liquid assets comprising shares, retail mortgage-backed securities (RMBS) and lower-rated company bonds.

As against the previous deadline of January 2015, the committee has agreed to extend the implementation of the proposed rule to 2019.

Without disruption to the orderly strengthening of banking systems, the minimum capital requirement will begin with 60% from 2015, which will be increased to 10% year-over-year and will reach 100% by January 2019.

The GHOS has reaffirmed the Liquidity Coverage Ratio (LCR) as an essential component of the Basel III regulation and a minimum capital standard.

GHOS chairman and Bank of England governor Mervyn King said that starting a phased timetable for the introduction of the LCR and reaffirming that a bank’s stock of liquid assets are usable in times of stress will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery.

The regulators have agreed that during periods of stress it would be entirely up to banks to use their stock of high quality liquid assets (HQLA) and can go beyond the minimum requirement.

Over the next few years, the regulators have agreed to complete the overhaul of the policy framework; continue to strengthen the peer review program launched in 2012 to monitor the implementation of reforms in individual jurisdictions.