What is it about?
This chapter highlights why the introduction of two liquidity standards, namely the LCR (Liquidity Coverage Ratio) and the Net Stable Funding Ratio (NSFR) - as well as the leverage ratios , supplementary leverage ratios and enhanced supplementary leverage ratios had to be introduced as complements to the Basel risk based capital adequacy framework - given the need to address the quality and quantity of capital - through the additional core capital requirements - as well as the introduction of conservative and counter cyclical capital buffers - features which were not present under Basel II. Moreover, additional capital buffer requirements were imposed on systemic global institutions (GSIBs).
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Why is it important?
The need to address pro cyclical effects (regarded as one of the major flaws of Basel II) prompted 2010 Basel III Regulations (liquidity standards/ LCR and NSFR - as well as leverage ratios) following the 2008/2009 Financial Crisis. It accentuated the fact that even though banks may still be operating within legally stipulated capital requirements, they may still encounter liquidity problems - as well as consequences of excessive deleveraging processes.
Perspectives
Counter cyclical buffers - as well as other macro prudential policy measures will have an increased complementary role to play with monetary policy -given the flaws and shortcomings in capital adequacy requirements. Liquidity transformations, maturity mismatches - as well as Securities Financing Transactions have significant roles to play in respect to the need to address liquidity risks - as well as current inadequacies of leverage ratios.
Prof Marianne Ojo
Northwestern University
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This page is a summary of: Great Expectations, Predictable Outcomes and the G20's Response to the Recent Global Financial Crisis: When Matters Relating to Liquidity Risks Become Equally as Important as Measures Addressing Pro Cyclicality, SSRN Electronic Journal, Social Science Electronic Publishing,
DOI: 10.2139/ssrn.1753653.
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