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Basel III, The Money Multiplier And Monetary Policy 

January 21, 2014
Philippe d'Arvisenet, Investing.com

The introduction of international liquidity standards in response to the 2007 financial crisis represents one of the main innovations under Basel III. In the short term, the Liquidity Coverage Ratio (LCR) determines the minimum quantity of liquid assets that banks must hold to cover outflows of cash triggered by a 30-day liquidity crisis. In the longer term, the new Net Stable Funding Ratio (NSFR) means that bank loans with a maturity of more than one year will have to be matched with funding of an at least equivalent maturity or sufficiently stable.

The short-term liquidity ratio, the main focus of this article, aims to keep a grip on credit institutions’ liquidity risk. It curbs their exposure (reducing maturity transformation and making them less reliant on shortterm market funding) and increases their ability to deal with liquidity risk by giving them a buffer of high-quality liquid assets. Aside from the ultimate purpose of making the banking system more resilient to a liquidity shock, this new standard interacts with monetary policy and the financing of the economy. It thus represents a new priority for central bankers.

Read more: Investing.com

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