EBA to Rank Most-Liquid Securities for Hitting Basel Goal

Europe’s top banking regulator will start ranking financial assets in order of liquidity as it implements international rules to protect banks from a sudden loss of short-term funding.

The European Banking Authority will create a “scorecard” of asset liquidity, the agency said in an e-mailed statement, as part of requirements that banks hold a buffer of assets, known as the Liquidity Coverage Ratio, they can quickly sell to survive a 30-day credit squeeze.

Central bankers from around the world, who make up the Basel Committee on Banking Supervision, agreed on Jan. 6 to give banks more time and the right to use more types of securities to meet the liquidity ratio. The LCR is part of an overhaul of global financial rules, known as Basel III, intended to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

“One of the issues is the interaction of liquidity risk and market risk,” Bob Penn, a financial services lawyer at Allen & Overy LLP, said in a telephone interview in London today. Regulators “might say we want things that are both highly liquid and with no market risk, but even when the debt markets were shut, you could sell your shares on the London Stock Exchange.”

Implementation Date

Ireland, which holds the rotating presidency of the EU, is pressing for an agreement to have the liquidity rule take full effect on Jan. 1, 2018, a year ahead of a deadline set last month by the global central bank chiefs. Global regulators had previously planned to implement the requirement fully as early as 2015.

The EBA’s analysis will “identify the features that are of particular importance to market liquidity” and report to the European Union’s executive body, the regulator said. Assets to be studied include mortgage-backed securities, equity and gold, the regulator said. Only assets issued in European currencies will be assessed.

The EBA will seek to come up with a definition of liquidity, “recognize that some asset classes are more liquid than others, and define which assets should be subject to a cap on their usage in the buffer,” the agency said in a consultation document on its website.

“If five years ago you would’ve described Greek debt as illiquid, people would’ve laughed,” Penn said.

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