Current Liquidity Formulations Give the Wrong Impression About Big BanksBanker Resource
September 4, 2013 — 1,168 views
Since 2010, many of the largest banks in the United States have shown a steady growth with regard to their liquidity requirement. Having said that, the calculations that are made by the Basel Committee on Banking Commission have shown that these banks have a different valuation of their liquidity which is not up to the standard. This has forced these big banks to request regulators to change their formulations for liquidity requirement as they believe these calculations to be deeply flawed. A 28-page document which was released by the Clearing House Association which includes members such as JP Morgan Chase, Citigroup and Bank of America argued that there should be a change in the liquidity rules in order to give a correct valuation of the progress made by US commercial banks.
How Have Banks Fared so Far?
The reason why the document was released was because US Commercial Banks have made huge strides in increasing their liquidity position over the last three years. Commercial banks have reduced their reliance for net short term funding, interbank loans and wholesale funding by $583 billion, $42.4 billion and $248 billion respectively after a study on the trade group was conducted. This has prompted the regulators to commence work on finding possible ways in which they could address the risks which are associated with short-term funding. These regulators have also requested banks to have more capital in their reserves in order to mitigate such risks. Global and US regulators have agreed with the proposal made to these commercial banks but they have not made it clear as to how they are going to proceed.
Where are the Changes Going to be Made?
When the Basel III agreement came out, the regulators made it clear that banks should comply with two liquidity ratios – Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR). These ratios were specifically designed to ensure that the banks would be able to manage their long-term and short-term liquidity needs. The agreement immediately raised eyebrows and it saw them make changes to their calculations with regard to the LCR as many banks criticized it for being too rigid. This made the regulators expand the different types of 'highly liquid' assets so that it could be mentioned in the required liquidity framework. Commercial banks are hoping that the regulators see the flaws with regard to the calculations of LCR as well as NSFR, so that it shows a correct valuation of the liquidity requirement.