Mervyn King on Liquidity Coverage Ratio (LCR)

Mervyn King chaired the Governors and Heads of Supervision (GHOS) group, the committee of top regulators and central bankers agreed to delay the full implementation of the Basel Liquidity Coverage Ratio (LCR).  The Basel committee members believed at the end of 2011 banks had a €1.8trn liquidity shortfall. Under yesterday’s deal, banks would only have to meet 60 percent of the LCR obligations by 2015, and the full rule would be phased in annually through 2019. The LCR was created under Basel III, with the intention of preparing banks for the possibility of a 30 day funding crisis in the future.

The pool of assets that can be submitted to meet LCR has also been broadened quite dramatically. The additional securities types will get larger haircuts than currently applies and they will only be accepted for up to 15% of the total. Under the 2010 plan, banks would have been allowed to use cash and government bonds to meet the LCR, subject to the quality of the sovereign debt, lenders could also have used highly-rated corporate debt or covered bonds to meet 40 percent of their LCR requirements. The new agreement extends the range, allowing some lower rated securities to count, including some equities and highly rated residential mortgage-backed securities.

Mervyn King said, "Nobody set out to make it stronger or weaker…..but to make it more realistic….This was a compromise between competing views from around the world…. For the first time in regulatory history we have a truly global minimum standard for bank liquidity…… The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery…. It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard……The committee and the regulatory community more generally felt it was appropriate to broaden the class of liquid assets…..That doesn’t mean to say it’s a loosening of the whole regime…. It became clear during the process of discussing all this that it didn’t make sense really to think about an LCR without having a clear view about what to make of access to central bank facilities.”