Basel III: Minimum Required Liquidity Coverage Ratio
The implementation of the Basel III standards introduces a progressive minimum liquidity coverage ratio for banks. It commenced at 70% in 2016 and gradually rose to reach 100% by 2019. The year-wise liquidity coverage ratio requisites for the aforementioned period are as follows: 70% for 2016, 80% for 2017, 90% for 2018, and, ultimately, 100% for 2019.
In response to the global financial crisis of 2008, the Basel Committee on Banking Supervision (BCBS) took significant steps to enhance the stability of the banking sector and bolster the overall economy. These efforts resulted in the creation of the Basel III regulatory framework, which introduced a series of stringent standards applicable to banks worldwide. Among the committee's key reforms is a particular focus on elevating the liquidity coverage ratio (LCR) requirements.
The primary objective behind the implementation of liquidity coverage requirements is to fortify banks' ability to withstand short-term liquidity risks. By imposing LCR standards, the aim is to ensure that banks maintain an adequate reserve of high-quality liquid assets (HQLA) that can swiftly and effortlessly be converted into cash. This reservoir of liquid assets serves as a safeguard, enabling banks to promptly address any unforeseen liquidity demands that may arise during a 30-day period of severe liquidity strain. Consequently, the new coverage ratio standards are expected to enhance the resilience of both individual banks and the banking industry as a whole, enabling them to navigate adverse financial or economic shocks more effectively.
The heightened level of financial coverage mandated by the new standards seeks to insulate the banking industry from potential economic crises. By maintaining a robust buffer of easily convertible assets, banks can reduce the likelihood of instability and minimize the likelihood of adverse effects cascading throughout the broader economy. These measures contribute to promoting greater stability, mitigating risks, and fostering a more resilient banking sector capable of withstanding future economic challenges.
Between 2015 and 2019, the Basel Committee on Banking Supervision (BCBS) devised a phased approach to implementing the new liquidity coverage requirements. However, the European Union (EU) banks have already embraced the new standards in their entirety, reaching full integration by 2016. Meanwhile, regulatory agencies in the United States have established a timetable mandating 100% compliance with the liquidity coverage ratio (LCR) requirement by 2017.
Implementation of Regulatory Standards in the United States
In the United States, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) collectively developed the final set of regulations to facilitate the implementation of the Basel III standards. These federal regulatory authorities hold the responsibility of ensuring adherence to the established guidelines within the country.