Tai Tailore l l ored to Sma d d to Small ll ll Mar Markets: k ets: Im Implementation of Basel III p lementation of Basel III Liquidity Requirements Liquidity Requirements Ch i Christopher Wilson h Wil Financial Supervision and Regulation Division Monetary and Capital Markets Department October 2015
Outline Outline Outline Outline Motivations for Basel III liquidity reforms q y Overview of Basel III liquidity framework Implementing LCR in small markets Examples from IMF TA 2
Motivations for Motivations for the Basel III the Basel III liquidity liquidity reforms reforms reforms reforms Benign liquidity conditions leading up to the crisis allowed banks g q y g p to take on excessive leverage Recognition that liquidity risk not being properly managed Need for greater attention by supervisors 3
Prior to Prior to the crisis, the crisis, benign liquidity benign liquidity conditions conditions allowed allowed ban b b anks to k k s to grow grow balance s b l ance sheets h eets Risk premia Risk premia in in the interbank market the interbank market Repo haircut index – Repo haircut index – corporate and orporate and (bps) (bps) structur struct structured financ structured ured financ finance sec finance sec securi ecuri urities rities (%) 250 50% 45% 200 40% 35% 150 30% 25% 25% 100 20% 15% 50 10% 5% 0 0% 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Sources: Bloomberg; BIS; and IMF staff calculations. ____________________________________________________________________________________________________________________________________ 4
Prior to the crisis, complacent about Prior to the crisis, complacent about liquidity liquidity risks liquidity liquidity risks risks risks “ Regulatory overkill is identified as the Regulatory overkill is identified as the greatest risk facing the financial sector for the second year running” y g PWC Banking Banana Skins 2006 1. 1. Too much Too much regulation regulation 2. 2. Credit Risk Credit Risk 3. 3. Derivatives Derivatives 4. 4. Commoditie Commodities 5. Inter 5 Inter Interest rate Interest rates rates rates 6. 6. High depend High dependency cy on technol on technology gy 7. 7. Hedg Hedge f fund unds 8. 8. Corporate 8. 8. Corpor Corporate Corporate governance ate gover governance overnance nance 9. 9. Emer Emerging markets ging markets 10. 10.……….. ……….. 5
Lapses in liquidity risk management Lapses in liquidity risk management contributed to the crisis contributed to the crisis The crisis exposed banks’ inadequate liquidity risk profile management and inaccurate liquidity risk pricing through: Heavy reliance Too much reliance on on short-term h t t external financing t l fi i funding HBOS Insufficient liquidity buffers to survive a disruption in funding disruption in funding markets
Example of Example of liquidity not being properly liquidity not being properly managed managed managed managed - - HBOS HBOS HBOS HBOS 200 2001 2008 008 CA CAGR Liquidity Liquidity Ratio atio (£ (£bn) (£bn) (% (%) Gr Group Group Gr Customer Loans 201.0 435.2 12.6 Loans / deposits ratio Customer Deposits 140.5 222.3 7.8 of 196 in 2008 Total Assets 274.7 630.9 12.6 Tangible Shareholders Equity (£m) 9,823 17,792 10.4 Loans/Deposits Ratio (%) 143 196 Wholesale funding < 1 year Wholesale funding < 1 year 89 8 89.8 119 4 119.4 Funding Funding Mix Funding Funding Mix Mix ix Leverage (Assets/TSE) (x) 28 35 Rising short-term Re Retail wholesale funding and Customer Loans 132.1 255.3 9.9 leverage Customer Deposits 102.0 143.7 5.0 Corporate ( (including Business B Banking in 2001 2001) Re Retail B il Business ness Customer Loans 55.1 123.0 14.4 Customer Deposits 22.2 38.5 10.5 Avg. loan growth ~2x ~2x avg. deposit growth In Internat atio ional nal Customer Loans 14.4 61.0 29.5 Customer Deposits 3.7 6.6 29.6 Treasury Corporate Business Corporate Business Deposits 12.6 33.5 15.0 Avg. loan growth ~1.5x ~1.5x Insu surance & & I Invest stment avg. deposit growth avg deposit growth General Insurance (Gross Written Premiums) (£m) G l I (G W i P i ) (£ ) 1,064 1 064 1 799 1,799 7 8 7.8 Investment Sales 7.8 11.2 5.3 Source: Parliamentary Commission on Banking Standards, 2013, “’An Accident Waiting to Happen’: The Failure of ____________________________________________________________________________________________________________________________________ 7 HBOS,” HL Paper 144 HC 705.
Global liquidity regulations -historical Global liquidity regulations -historical perspective perspective perspective perspective 2013 2013 2000 2000 Sound Practices 2008 2008 for Managing LCR Liquidity in Banking Sound Practices 1988 Organizations for Liquidity q y Basel 1 Basel 1 Risk Management Capital Accord 2004 Basel 2 2014 2014 Capital 1996 Accord 2010 2010 Market Risk NSFR Amendment to Capital to Capital Accord Basel 3 8
Examples of country-by-cou Examples of country-by-country liquidity try liquidity regulations regulations prior regulations prior regulations prior to rior to to Basel to Basel Basel 3 Basel 3 South Korea South Korea South Korea South Korea LDR ratio 100%, LDR ratio 100%, Current Assets/ Current Assets/ Current Liabilities Current Liabilities U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. (100%) (100%) (100%) (100%) Sterling Stock Sterling Stock floor, floor, scenario analysis scenario analysis U.S.A. U.S.A. U.S.A. U.S.A. C C Coverage ratio Coverage ratio i i Japan Japan Japan Japan No quantitative No quantitative ratio, scenario ratio, scenario analysis analysis Australia Australia ralia ralia 9% HQLA/total 9% HQLA/total liabilities & 5 day liabilities & 5 day name crisis name crisis 9
Basel III Basel III is a is a comprehens comprehensive liquidity ive liquidity framework framework Short-term Sh t t Resilience LCR Principles for Sound NSFR Liquidity Risk Management g Long-term Risk Resilience Management
BIII: Principles for Sound Liquidity BIII: Principles for Sound Liquidity Risk Risk Management Management Published in 2008, revised and strengthen the BSBC practice guidance (2000) LCR Principles for Sound Liquidity Risk Management Management Principles for sound NSFR liquidity risk management g 13 principles for banks 13 principles for banks 4 principles for supervisors i i l f i
Basel III Basel III Liquidity Framework: LCR Liquidity Framework: LCR Objective is to promote short Objective is to promote short term resilience, 30 day time LCR horizon LCR Principles for sound NSFR liquidity risk Categories management g High level of prescription High level of prescription of liability regarding HQLA eligibility structure Based on stressed assumptions
Basel III Basel III Liquidity Framework: NSFR Liquidity Framework: NSFR Objective to promote longer term Objective to promote longer term resilience, 1 year time horizon NSFR Principles for sound NSFR liquidity risk management g Factors applied to assets and Encourages greater matching of liabilities assets and liabilities
Principles for Principles for Sound Liquidity Risk Sound Liquidity Risk Management and Management Management Management and and Supervision and Supervision Supervision, upervision BCBS , BCBS BCBS 2008 BCBS 2008 2008 2008 Adequate Adequate Liquidity risk liquidity tolerance cushion Allocate costs, Severe stress benefits and scenarios scenarios risks k Identify & Contingency measure full funding plan range of liquidity risks BCBS BCBS Intraday Market liquidity risk discipline 2008 and collateral Detailed guidance on the risk management and supervision of funding and liquidity risk 14
The new Basel III The new Basel III metrics metrics Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NFSR) Two complementary metrics with different time horizons Stock of High Quality Liquid Assets Available Amount of Stable Funding > 100% > 100% Net cash out over 30-day period under stress Required Amount of Stable Funding LCR: to ensure that a bank NSFR: a full balance-sheet maintains an adequate level metric, compares an estimate of unencumbered, high of reliable funding sources to quality assets that can be an estimate of required stable converted into cash to meet d i h f funding over the 1 year di h 1 liquidity needs for a 30-day horizon, under more time horizon under an acute prolonged but less acute liquidity stress scenario stress than in the LCR 15
LCR LCR in detail LCR LCR in in detail detail etail Main M i M i n fea f eatures t ures 30 day time horizon y Promote short term resilience 100% threshold Idiosyncratic and market- Stock of HQLA wide stress Stressed assumptions for Estimation of stressed b both assets and liabilities h d l b l Three categories of HQLA outflows Segment and categorize li bilit liability structure t t Calibration of run-off rates 16 16
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