On Tuesday, September 8, 2015, the CPA Ferrere Risk Management Chair held its second meeting on financial risk regulations.
The event, titled “Liquidity Coverage Ratio: Experiences, Lessons Learned, and Key Challenges for Implementation,” was held in the auditorium of the School of Business and Social Sciences.
The speakers were Alejandro Pena, Director of Financial Risk at the Central Bank of Uruguay, and Verónica Balzarotti, Senior Manager of Economic Research at the Central Bank of Argentina and a member of the Basel Committee’s Liquidity Risk Group.
The RCL and NSFR ratios
Pena's presentation focused on three main areas:
1) the historical context that led to the introduction of liquidity ratios, a description of the liquidity coverage ratio (LCR) and its components;
2) the specific case of the proposed regulations for Uruguay under the roadmap;
3) the specific characteristics of the Uruguayan financial system as they relate to the implementation of the regulation.
The first part of the presentation addressed the introduction of the RCL liquidity ratios and the net stable funding ratio (NSFR) as a practical response to the principles issued by the Basel Committee in the wake of the 2007 crisis, which some authors view as a systemic liquidity crisis.
The first of these ratios (which Uruguay expects to have standardized by the end of 2015, so that financial institutions can begin reporting it in 2016, with the regulation taking effect in January 2017) is primarily intended to ensure the short-term liquidity (30 days) of financial institutions through the sale of high-quality liquid assets.
The second ratio, on the other hand, takes a longer-term view (1 year) and includes some less liquid instruments as eligible for sale.
The second key point of the presentation highlighted that the RCL replaces the current regulations on minimum liquidity requirements, which will be calculated separately for relevant domestic and foreign currency positions (when liabilities in that currency exceed 5% of total liabilities), as well as on an aggregate basis.
Finally, regarding the characteristics of the local financial system, Pena mentioned that he had conducted an impact analysis for public and private banks, all of which generally met the minimum requirements established by the regulations for the RCL.
In conclusion, he emphasized that short-term loans in the international financial sector with maturities of less than 30 days (which account for a significant portion of local banks’ lending) cannot be classified as ALACs (Advocacy and Legal Advice Centers) under current regulations, although he acknowledged that this is a topic of ongoing discussion with the banks.
International standards
For her part, Dr. Balzarotti divided her presentation into two parts:
1) international standards and the liquidity ratio;
2) the results of the survey conducted in 2015 by the Basel Committee’s Working Group on Liquidity regarding the implementation of the regulations in the various G20 countries and the challenges encountered.
In the first part, Balzarotti began by describing the Basel Working Group’s roadmap regarding the liquidity risk framework and reiterated the implementation timeline for the LCR and NSFR ratios.
The first will take effect at 60% in January 2015 (reaching 100% only in January 2019), and the second is scheduled to be fully implemented in January 2018. He also presented the implementation schedule for the regulations in Argentina and the key documentation related to liquidity risk.
Barzarotti provided a detailed analysis of the components of ALACs, as well as the criteria to be used for classifying and weighting the various cash flows, both inflows and outflows.
When discussing the net cash flows used in the denominator of the RCL, Balzarotti once again emphasized operating deposits. He noted that for a deposit to be considered an operating deposit, it must meet the following requirements:
1) the client has an established business relationship with the bank, whether for clearing, custody, or treasury management;
2) that the customer also be substantially dependent on the bank in carrying out these activities, a dependency guaranteed by a legally binding agreement and the existence of barriers to switching;
3) is an account specifically designated for that purpose;
4) the funds are available during the RCL calculation period (30 days). The key point here is that there is no consensus within the Basel Committee on the percentage of the operational deposit to be included in the calculation (since this depends on the type of bank-customer relationship), leaving this matter to the discretion of the local supervisor.
In conclusion, Balzarotti presented the results of the survey conducted in 2015 by the Basel Committee’s Working Group on Liquidity regarding the implementation of the regulations in the various G20 countries and the challenges encountered.
It shows the varying degrees of progress and the criteria used by each country in implementing the liquidity coverage ratio.
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