Basel Committee Agrees To Restricted-Use Liquidity Facilities

The Basel Committee's supervision committees have today produced an amendment to the ruling relating to liquidity coverage ratio, allowing jurisdictions

The Bank For International Settlements (BIS) has today announced the amendment to the final form of the Liquidity Coverage Ratio (LCR) which was originally set in place exactly one year ago by the Basel Committee’s oversight body, the Group of Governors and Heads of Supervision (GHOS).

The Committee agreed to modify the definition of high quality liquid assets (HQLA) within the LCR to provide greater use of Committed Liquidity Facilities (CLFs) provided by central banks.

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According to the BIS, the use of committed liquidity facilities within the specified liquidity ratio has now been limited to those jurisdictions with insufficient HQLA to meet the needs of the banking system. The Committee has agreed that, subject to a range of conditions and limitations, a restricted version of a CLF (an RCLF) may be used by all jurisdictions.

The Group of Governors and Heads of Supervision have decreed that whether specific regions elect to make use of an RCLF is subject to national discretion and can be conducted on a regional basis, and that central banks of specific jurisdictions are not under any obligation to offer them.

Furthermore, the restrictions agreed by the Committee are intended to limit the use of RCLFs in normal times, and therefore maintain the principle that banks should self-insure against liquidity shocks, and that central banks should remain the lenders of last resort. These restrictions may, however, be relaxed during times of stress, when HQLA might otherwise be in short supply.

As a rule of thumb, this amendment is advisory and makes a provision for RCLFs to be available if required, and is applicable to the wider electronic trading industry, rather than specific to FX, however as the Basel Committee  presides over Europe’s rulings with relation to liquidity, such an amendment is indeed noteworthy.

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