In a surprise move, the Basel Committee indicated this week that they're still open to tweaking ($) the new liquidity requirements.

The liquidity requirements are a massive deal for banks, although you wouldn't know that from reading the financial press, which hardly ever mentions them. The Basel Committee's "quantitative impact study" showed that banks face a shortfall of liquid assets of $2.48 trillion for just one component of the liquidity requirements, which is over three times the size of the banks' capital shortfall under Basel III.

The liquidity requirements are by far the most important outstanding aspect of financial reform, so the fact that the Basel Committee is open to tweaking them even a little is a big deal. However, the secretary-general of the Basel Committee, Stefan Walter, did make clear that they were not open to one particular argument from the banks:

A key element of the rules are its assumptions about the rate at which different bank funding sources run off in a liquidity crisis, but Walter warned that the Basel Committee will not be swayed by observed run-off rates from the stressed conditions of the last few years. "If an institution comes to us and says ‘Here's our experience in terms of outflows during the crisis,' we would point out that those were recorded in the context of massive public support," he said.
Gee, that rebuttal sounds familiar. Oh yeah, here's what I wrote about the liquidity requirements way back in August:
[The banks'] main argument involved claiming that the run-off rates they experienced during the financial crisis were materially lower than the Committee's proposed run-off rates. This, they argued, demonstrated that the Committee was being excessively conservative. (See e.g., JPMorgan, passim)

The problem with this is that it's a really, umm, stupid argument. Yes, the run-off rates were probably lower during the financial crisis, but there were also massive government bailouts during the financial crisis. After Lehman failed, the market only made it 2 days without a government bailout — the Fed rescued AIG on Tuesday night, and Schumer leaked that the government was planning a system-wide bailout on Thursday. Regulators were kinda-sorta hoping that we could do the next financial crisis without massive government bailouts.
Good to see the Basel Committee giving the banks' argument the treatment it deserves!


rufus mcbufus said...

So then, there should NEVER EVER be any government bailouts ever again. Wouldn't you agree? Please write this 100 times on the blackboard and apologize for your "profession".

Bootvis said...

" shortfall under Basel III."

should be

" shortfall under Basel II."

or am I being obtuse?

Carter said...

There is something of a survivor bias in the numbers: those who survived didn't experience the runoff. But ask Northern Rock, Wachovia, Countrywide, WaMu....

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