Liquidity Coverage Ratio: New Basel Measurement Published

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On January 6, 2013, the Group of Governors and Heads of Supervision (“GHOS”), which oversees the Basel Committee on Banking Supervision (“BCBS”), approved a significantly revised version of the liquidity coverage ratio (“LCR”) that the BCBS has prepared. The LCR was designed to test a banking organization’s ability to withstand a liquidity crisis over a 30-day period. The revised LCR modifies certain elements of the original LCR, published in December 2010 as part of the Basel III framework, and extends the deadline for full compliance with the LCR requirements. The inclusion of liquidity measurements in capital standards was a new development and, as originally conceived, generated criticism from the banking community as overly stringent. The BCBS announced in 2011 that it would revisit the LCR; the revised LCR is the result of this study.

The LCR is the ratio of unencumbered high quality liquid assets (“HQLA”) to net cash outflows over the next 30 calendar days. Perhaps the most significant change to the original LCR is the addition of assets — residential mortgage-backed securities (“RMBS”), corporate debt, commercial paper, covered bonds, and common equity — to the pool of assets that may be included in HQLA. (As discussed below, these assets comprise a subset of HQLA known as Level 2B.) The effect of this change may be a little bit less than meets the eye for U.S. banking organizations for two reasons...

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