The Basel Committee on Banking Supervision proposed in June 2013 that, starting in 2018, banks should be required to comply with a 3% leverage ratio on capital ratios. This proposal is designed to bring to an end the era of financial institutions that are ‘too big to fail,’ installing in its place an era of mandated prudence. In response, the global finance sector has argued that requirements for individual banks to hold equity equal to 3% of total assets would cripple low-risk activities like consumer lending and trade finance.
The report examines the challenges these Basel III-mandated risk mitigation measures pose to liquidity managers at investment banks – namely, CEOs, CFOs and their associated senior management committees. The report lays out a series of effective principles that liquidity risk managers can use to guide them through a fundamental shift in the regulation of the management of investor capital away from a long-standing principles-based approach and toward a more rules-based system.
In exploring approaches to effective liquidity risk management, the report lays out principles and practical guidelines for banks on how best to mitigate risks associated with netting transactions at clearinghouses and the interoperability challenges associated with the need to deal with multiple central counterparties on a daily basis. The report includes practical checklists that liquidity risk managers can use to identify factors affecting intra-day margin calls and same-day settlement obligations.
