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Exclusive Video: MEPs say liquidity definitions risk over-reliance on govt debt

Monday 21 February 2011 - by GFS TV

 Leading policymakers in Europe have expressed concerns over the design of new liquidity ratios for banks to be introduced under Basel III recommendations, saying the current definitions encourage an over-reliance on sovereign debt.

Speaking to GFS TV, rapporteur for CRD IV Othmar Karas MEP says he does not agree with concentrating liquidity into certain asset classes and says diversification and "partial flexibility" must be ensured in the design of the ratios.

Karas says: "Excessive concentration into one particular asset class including Government debt has to be discouraged."

Economic and Monetary Affairs Committee chair Sharon Bowles MEP says she is not sure there is enough sovereign debt to go round and says: "it's all very much eggs in one basket which worries me".

Bowles says she is concerned about the definition of high quality liquid assets as it stands saying "there are big problems here".

Click through to the next page to watch the video


European Banking Federation secretary general Guido Ravoet says that if other financial assets are less recognised as liquid assets, there is a real risk of too high concentration of sovereign debt within banks.

Ravoet says: "As a matter of principle, banks want to have a diversity of issuers and instruments with regard to their liquidity management and we think this should be taken into account by the policymakers."

He would like to see gold and other precious metals considered as liquid assets in the calculation of the liquidity ratios.

He adds: "We think also that liquidity of equities in general could be better recognised. And also even the bonds of financial institutions they are less recognised than bonds of other corporates of the same quality which is a strange thing."

As Natalie Dempster from the World Gold Council points out, "even sovereign debt can abruptly turn illiquid" and says she is concerned about the over-reliance on it.

Basel III reforms will be introduced in Europe under the fourth revision of the Capital Requirements Directive. Basel III introduced liquidity requirements for banks for the first time.

Two liquidity ratios are being introduced; the liquidity coverage ratio and the net stable funding ratio.


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