Opinion article written for Global Risk Regulator/FT Specialist

In a recent opinion article, Orbit36 managing partner Andreas Ita was invited to share his views on the BCBS’s progress report on liquidity risk with Global Risk Regulator/FT Specialist – the Financial Times’ dedicated resource for senior professionals working in global financial risk and regulation.

Main points:

• Encouragingly, the BCBS recognizes the importance that banks hold capital and liquidity at both the legal entity and consolidated group level. This is notable, since the Basel III framework only applies on a consolidated basis to internationally active banks. Rules at the legal entity level are set by national authorities and are different across jurisdictions.
• In the case of Credit Suisse, High-Quality Liquid Assets (HQLA) used to meet local liquidity ratio requirements were inaccessible to the firm’s parent entity, Credit Suisse AG. The lack of collateral hampered Credit Suisse’s ability to use the Swiss central bank’s emergency liquidity facility and sent the bank into a tailspin.
• The collapse of Credit Suisse also highlighted liquidity needs not captured in the Liquidity Coverage Ratio (LCR). Switzerland’s decision to impose additional liquidity requirements for systemically important banks in 2022 proofed to be warranted. It is a missed opportunity that the BCBS stops short of ruling whether a similar approach is needed for large international banks.
• The current LCR framework assumes that banks can use their liquidity buffers in a crisis. However, this is not realistic since clients and the market will not trust a bank with an LCR below 100 percent. This creates a “bank run after the bank run” dilemma and highlights the need for central bank facilities available on a standing basis.
• The claim that the LCR does not distinguish between outright sales and repo transactions is debatable. It is inconsistent tor the BCBS to ignore unrealised losses on securities valued at amortised cost when calculating capital and then question their usability as a reliable source of liquidity for that very reason.

The original article “BCBS’s liquidity risk plans fall far short of expectations” was published in Global Risk Regulator on 4 November 2024 and is accessible on https://www.bankingriskandregulation.com/bcbss-liquidity-risk-plans-fall-far-short-of-expectations/ (please register for a free trial)

A copy of the article is available below, with the thankful permission of Global Risk Regulator/Financial Times.