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Friday, March 31, 2017

ABA to Treasury: ‘Destabilizing’ Liquidity Standards Need Changes

In response to President Trump’s executive order outlining “core principles” for financial regulation, ABA submitted feedback to the Treasury Department on changes needed to address the “destabilizing effects” of the Basel III liquidity standards.

While emphasizing that liquidity is an essential element of bank management and supervision, ABA explained that Basel’s definition of “high-quality liquid assets” is too narrowly defined, which could result in abrupt shortages of liquidity in times of stress. ABA also took issue with the two key Basel III liquidity measures: the near-term Liquidity Coverage Ratio, which it said imposes a static structure on the “dynamic reality of liquidity management,” and the longer-term Net Stable Funding Ratio, which it said is “duplicative and out-of-date.”

ABA said,
We recommend a Treasury-led review of these liquidity standards to ensure that they suitably fit U.S. conditions and markets, including consideration as to whether the appropriate purposes of liquidity standards can be effectively met with less complexity.

The white paper is the first of several that ABA will submit to Treasury in response to the executive order. Future papers will cover capital standards and housing finance, among other topics. The white paper reflects feedback and input from numerous banks participating in ABA’s liquidity working groups over recent years.

Read the white paper.
Read ABA’s letter to Treasury.

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