Banks to Boost Liquidity With Illiquid Assets: Chart of the Day

Regulators are allowing banks to boost liquidity with assets that proved tough to sell when markets froze in the 2008 credit crunch.

The CHART OF THE DAY shows how relative yields on the lowest-rated investment-grade corporate bonds, now accepted by regulators as liquid assets, blew out to as much as 7.3 percentage points during the crisis when investors shunned the notes, according to Bank of America Merrill Lynch index data. Higher-rated AA securities, previously the minimum accepted, held tighter than 1 percentage point over benchmarks.

The Basel Committee on Banking Supervision eased rules on the amount and range of easy-to-sell assets lenders must have available to cover a 30-day run on deposits or other short-term disruptions to funding. Corporate debt, which previously had to be graded in the top four ratings categories to be considered liquid, now can be graded as low as BBB-, one step above junk.

“I just don’t think corporate bonds are liquid enough to be included, especially if you need to sell in any size,” said Chris Bowie, head of credit portfolio management at Ignis Asset Management in London, which oversees about $110 billion of assets. “Banks will struggle to sell in a crisis, or if wholesale markets close like they did in 2008.”

The Basel Committee delayed full implementation of the rules until 2019, rather than 2015 as originally proposed. Lenders will be permitted to use lower-rated securities to cover as much as 15 percent of their liquidity requirements and the value of the corporate bonds used will be discounted by 50 percent.

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