The minimum liquidity coverage ratio that banks must have under the new Basel III standards are phased in beginning at 70% in 2016 and steadily increasing to 100% by 2019. The year-by-year liquidity coverage ratio requirements for 2016, 2017, 2018 and 2019 are 70%, 80%, 90% and 100%, respectively.
Basel III Standards
In the wake of the 2008 financial crisis, the Basel Committee on Banking Supervision, or BCBS, produced a new set of regulatory standards for the banking industry worldwide, designed to provide greater financial stability for banks and the economy as a whole. One of the committee’s major reforms revolves around much more stringent requirements for the liquidity coverage ratio, or LCR.
The stated objective of the liquidity coverage requirements is to improve resilience in banks’ short-term liquidity risk profile. The LCR requirements are designed to ensure banks maintain an adequate level of readily available, high-quality liquid assets, or HQLA, that can quickly and easily be converted into cash to meet any liquidity needs that might arise during a 30-day period of liquidity stress. The new coverage ratio standards should improve the ability of individual banks and the banking industry as a whole to successfully weather adverse financial or economic shocks. The increased financial coverage level required is designed to better insulate the banking industry from potential economic crises, and to reduce the possibility of bank instability having a spillover effect on the rest of the economy.
U.S. Adoption of Standards
The BCBS outlined a gradual phase-in of the new liquidity coverage requirements between 2015 and 2019, but banks in the European Union will have already fully integrated the new standards by 2016, and U.S. regulatory agencies have implemented a timetable that mandates 100% compliance with the LCR requirement by 2017.
In the United States, the three federal regulatory authorities that jointly developed the final set of rules for implementing the Basel III standards are the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, or FDIC.