The liquidity coverage ratio as recommended by the BIS : a study of its effects on financial services

Abstract

In the wake of the financial crisis, there has been a greater emphasis on bank liquidity, in the sense that banks need not only to be highly capitalised, but also to be liquid at all times. The reason is that during the financial crisis, despite having adequate capital, some banks still failed due to a relatively lack of liquidity. In response to the financial crisis, the Bank for International Settlements along with the Basel Committee on Banking Supervision developed a reform package to strengthen the capital regulations for banks, and most importantly to ensure that banks manage their liquidity in a prudent manner. In order to address the liquidity problems faced by most banks in the financial crisis, the Committee developed a liquidity framework for banks, which sees the introduction of internationally harmonised liquidity standards for the first time. One of these standards is the Liquidity Coverage Ratio (LCR), which stipulates the minimum amount of liquidity that needs to be held by banks in order to sustain short-term liquidity disruptions. This in turn reduces the possibility for a bank to fail as a result of a shortage of liquidity. The aims of this study are to analyse the implementation of the LCR by local banks, to analyse the reaction of local banks to the introduction of the LCR, and especially to analyse the effect of the LCR on local banks. This study is based on qualitative research, consisting of conducting interviews with local banks along with an interview with the local regulator. On the basis of the information collected from the interviews, one can then draw some conclusions about the implementation, perception and effect of the LCR in the local banking market.