only GSE-backed residential mortgage-backed securities, or RMBS, are allowed as HQLA, while in the European Union, private label RMBS are allowed in some cases. Unfortunately for global firms, leveling an HQLA in one country doesn’t mean that you’ve found the right level and haircut for another country. This is reasonably achievable for equities, but much more difficult for mortgages and government bonds as it takes staff time and data reporting power to do the analysis in an accurate way. In the U.S., filers have to do some additional analysis to determine whether the asset is “liquid and readily marketable.” To be fully compliant, banks have to have a process in place to measure whether there’s more than two committed market makers in the secondary market, have a large number of non-market maker buyers and sellers and provide the relevant pricing and volume analysis.įor 2A and 2B assets banks also have to access historical price information to find out when and to what degree the last price drop on the security occurred. government-sponsored entities as level 2A assets. For instance, it’s not enough to flag all securities that are backed by U.S. One of the biggest headaches banks are running into is the requirement to perform a security-level analysis to determine whether an asset is HQLA-eligible and then dropping it into the right eligibility bucket with the corresponding haircuts. Strict requirements to document compliance efforts are also time consuming. filers report (under FR2052a) using enough granularity that the regulators can recreate their LCR calculations and double check the banks’ work. In the U.S., the Federal Reserve is demanding that U.S. This will undoubtedly create a red flag for regulators. The security-level analysis required, the various interpretations of global jurisdictions and the daily reporting requirement are creating headaches for bank compliance teams around the world.īanks are starting to find out that the analysis they’ve done on a certain security they hold may not match the analysis that another bank has done. However, after just a few months into the reporting, compliance is proving to be a bit more difficult than previously imagined.
In the U.S., for instance, the Federal Reserve noted last fall that the liquidity requirement would be manageable because about 70 percent of institutions already met the standard. Early reports from around the world showed that banks have improved their liquid positions.
#High quality liquid assets full#
The full requirements for daily reporting and holding 100 percent of high-quality liquid assets, or HQLAs, to cover 30-day stressed outflows will be phased-in during the next few years according to various country standards. This January marked the roll out of the liquidity coverage ratio, or LCR, under the new Basel III framework. They say banks must first spend time organizing their market and internal data and, for global firms, international differences must still be solved before the longer-term net stable funding ratio is introduced later this year. As banks start daily reporting under the Basel Committee on Banking Supervision’s liquidity coverage ratio, compliance is proving to be more difficult than originally thought, according to Bloomberg Enterprise Solutions’s Cady North and Matthew Debrabant.
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