This blog traces the continued regulation of bank working capital, as it has moved, post Lehman, from the long end of capital and liquidity regulation to the sharp end of intraday liquidity management.

This has been managed, albeit slowly, over three major steps.

1. Individual national regulators managed the problem, largely by implementing liquidity reporting regimes, and methods to prevent a future long-term liquidity crisis. For example, the UK’s liquidity framework, as implemented by what was then the Financial Services Authority, was actively applied to all UK banks.
2. The BIS, as global supervisors, have set standards and definitions for the measurement of long- and short- term liquidity. These standards and definitions have been largely accepted internationally. Banks have implemented their solutions for the funding and reporting requirements from their accounting and product processing systems, in end-of-day batch solutions.
3. And in 2013, the BIS produced its rules and standards for the measurement, management and reporting of intraday liquidity – in the expectation that these would be universally adopted in 2015. This is the sharp end, in that the first two steps have required systems and management to measure long term funding to meet a bank’s long-term obligations. But intraday liquidity management is by definition a real- time issue, requiring a bank to measure and manage its liquidity positions at any point in the day, across all major payment and settlement systems. And what do you do to improve liquidity positions, even if you can measure them?

This third step is set out by the BIS  in the form of intraday liquidity reporting tools required (see below).

Is this being universally applied, and consistently, since BCBS permits national regulators to put their own spin on this? The answer is that the timeline doesn’t seem to be consistent, but the intent to regulate appears to be the same in all major currencies. Two major examples are in Australia, where APRA is following BIS guidelines to the letter, and in the US, for which the Fed has put its own strong imprint on this for the LCR.

If it is not the same the whole world over today, it will be over time. All banks will need to report on liquidity intraday and long-term, and will have to hold more liquidity in reserve in order to be licensed to operate.

The BIS have implemented definitions for the measurement of liquidity in two ways.

“Net Stable Funding Ratio (NSFR) ….The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank!s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.”

The Liquidity Coverage Ratio (LCR). The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. ….This (LCR) standard aims to ensure that a bank has an adequate stock of unencumbered High Quality Liquid Assets (HQLA) that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. At a minimum, the stock of unencumbered HQLA should enable the bank to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and supervisors, or that the bank can be resolved in an orderly way.

It is the use of the LCR which leads into the measurement of intraday liquidity.

September 2014, Washington.

US regulators have finalised details of the Liquidity Coverage Ratio, which will require banks to hold a certain amount of assets that can be quickly turned into cash –providing protection in the event of a future credit crunch.

Banks subject to the new measures will have to hold a total of about $2.5tn in high quality liquid assets (HQLA) over a 30-day stress period– which is $100bn more than they currently do. Eligible HQLA Assets include Fed reserves and Treasury securities.

This liquidity rule is the US implementation of the global Basel III reforms aimed at preventing a repeat of the financial crisis. It will apply initially only to the largest US banks. But the Fed anticipates extending the measures to the US holding companies of the largest foreign banks, which have to be established by July 2016 under new Fed rules.

Basel Committee for Banking Supervision – Intraday Liquidity Monitoring tools, set out in BCBS248

Tools applicable to all reporting banks

Tools applicable to reporting banks that provide correspondent banking services

Tool applicable to reporting banks

“The reporting of the monitoring tools will commence on a monthly basis from 1 January 2015 to coincide with the implementation of the LCR reporting requirements.”

“It is important to note that the tools are being introduced for monitoring purposes only. Internationally active banks will be required to apply these tools. These tools may also be useful in promoting sound liquidity management practices for other banks, whether they are direct participants5 of a large-value payment system (LVPS) or use a correspondent bank

This is a reprint of an article from TSCL’s recent Newsletter 17 – for more information and a copy of the full Newsletter, please email info@sepa.eu.com