Basel III - Liquidity Risk Standards
This video discusses the two liquidity standards developed by the Basel Committee for internationally active banks as a part of Basel III Liquidity Risk Framework. Both these standards have separate but complimentary objectives for supervisors to use in liquidity risk supervision.
Basel III is a global standard for capital adequacy, and liquidity risk developed by the Basel Committee on Banking Supervision. As a part of the Basel III framework, the Basel committee published the Liquidity Risk Measurement Framework.
In this article we will discuss the two liquidity standards developed by the Basel Committee for internationally active banks. Both these standards have separate but complimentary objectives for supervisors to use in liquidity risk supervision.
The first objective is to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have sufficient high-quality liquid assets to survive a significant stress scenario lasting 30 calendar days. The Committee developed the Liquidity Coverage Ratio to achieve this objective.
The second objective is to promote resilience over a longer time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The Net Stable Funding Ratio has a time horizon of one year and has been developed to capture structural issues to provide a sustainable maturity structure of assets and liabilities.
Let’s look at these two ratios in more detail.
Liquidity Coverage Ratio: The objective of this standard is to ensure that a bank maintains an adequate level of high-quality liquid assets that can be converted into cash to meet its liquidity needs for 30 days under a significantly severe liquidity stress scenario specified by supervisors.
This standard requires that the ratio of high-quality liquid assets to total net cash outflow over the next 30 days is more than or equal to 100%.
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