Defining high quality liquid assets
Friday 4 March 2011 - by Andrew Hickley
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.
"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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