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Defining high quality liquid assets

Friday 4 March 2011 - by Andrew Hickley

EC's Mario Nava and HSBC's Michael Anderson
 The European Commission hinted it may reconsider the definition of high quality liquid assets at a debate on the capital requirements directive in Brussels on Wednesday. Andrew Hickley reports.

The EU commission this week reiterated its intent to test the liquidity of a number of assets to assess their potential for inclusion in the capital requirements directive's new liquidity coverage ratio.

Speaking at a debate on CRD IV in Brussels, Mario Nava, head of the commission's banking and financial conglomerates unit, admitted that further testing is necessary before the commission signs off its recommendations.

Nava hinted at the event hosted by Cicero Consulting that he would be looking at reducing the LCR's current reliance on sovereign debt.

MEPs and industry have fought hard for an extension of assets allowed under the LCR, which forces banks to maintain enough liquidity to ensure they can cover net cash outflows over a 30-day period during a crisis event.

The banking industry is pushing for equities, corporate bonds and commodities such as gold to be added to these high quality liquid assets.


"Is it good, is it bad? I don't know," he said of the current balance.

"My private opinion is that we will need to see over time, but I still very much attach the fact that a number of corporate bonds for example have been shown to work pretty well during the crisis, they have shown to have a bigger spread which is relatively good."

Deutsche Bank's director and head of liquidity risk management Andreas Heise argued that the scope must be widened even if just to avoid a "self-fulfilling prophecy".

"If you argue that a product is not eligible to perform as part of the buffer, of course banks will decide to no longer use it or trade it, and then it becomes illiquid per se," he said.

"What will happen is that either the market will be willing to accept a higher cost on certain products, or they will disappear."

Supporting widening the definition of high quality liquid assets, Heise argued that these holdings had displayed high liquidity, with price volatilities that might affect their inclusion offset by hedging against the risks.


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