Reply #22: Basel liquidity rules, going neo-medieval [View All]

[Pale Blue Dot]

Can we talk a bit more about the scandal of Basel III allowing banks to give government bonds a zero risk weighting on their books? This time regarding Basel’s liquidity rules.

Actually, can we talk about the related global shortage of AAA-rated assets and what that means for sovereign debt as well?

Buried in recent regulations on Basel’s liquidity coverage ratio, we’ve found a few interesting new provisions on what are called Level 1 and Level 2 liquid assets. Banks have to hold enough of these to be able to withstand 30 days of net cash outflows under a stress scenario (think Lehman-level stress, bank runs, general end-times, etc).

The provisions basically present a ‘post-sovereign’ view of acceptable assets, if you will, worthy of contrasting with those zero risk weights.

http://ftalphaville.ft.com/blog/2010/12/20/439811/basel-liquidity-rules-going-neo-medieval/