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Basel III liquidity rules: it’s a matter of culture 

February 12, 2014
Moorad Choudhry, Qfinance

As everyone by now knows, the real significant difference between Basels I and II and Basel III isn't the capital stuff, it’s the liquidity requirements. The first two regimes didn't address liquidity (one may think that’s odd, but the theoretical reason was that banks perceived as funding-weak would be shunned by customers as a home for their deposits – a market-based solution, if you like...) By contrast, Basel III is chock full of text on the subject. And, of course, we are by now very familiar, and in cases possibly slightly apprehensive, about the liquidity requirements in the Basel III regime. The acronyms themselves encompass some relatively straightforward arithmetic: for example, the Liquidity Coverage Ratio (LCR) is calculated by dividing a bank’s “High Quality Liquid Assets” by its “30-day stressed outflow cash flows”.

Of course, everything is relative. Who is to determine what is “liquid”? As for the denominator, just how much of a bank’s customer deposits and wholesale liabilities would depart from the bank if there were some sort of crisis? (And only depart in the next 30 days; any departures after that aren't a concern of LCR!)

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