Fitch Ratings says that bank regulators’ decision to ease proposed new liquidity requirements, and to phase them in over time, makes sense given the still-tough economic climate.
The rating agency said Tuesday that the recent agreement by regulators to change the definitions and stress assumptions for new liquidity requirements, delay its full implementation, and to allow banks to use their liquidity buffer in times of stress, “sets a more realistic parameter for banks.”
Regulators have widened the liquid asset criteria to include lower-rated corporate debt, equities and residential mortgage-backed securities, which Fitch says could help provide some diversification to the liquidity portfolio. Although they can only make up 15% of the buffer; and, in order to be included, the specific assets must have a proven track record as a reliable source of liquidity during a period of significant liquidity stress.
Still, Fitch says that the new approach will provide the banks with more flexibility and better reflect how liquidity pools are managed. It could also help minimize any market distortions caused by more narrow regulatory definitions, it notes.
The stress assumptions have also been weakened, which Fitch says appears “to be a sensible recognition of the actual inflows and outflows experienced during times of stress.” And, it notes that allowing banks to tap their liquidity in periods of stress provides them with additional flexibility.
The impact of the implementation delay is likely to be mixed however, Fitch notes, “with market confidence and national regulator discretion important considerations.”
“Some of the strongest banks may look to slightly reduce liquid assets while others will maintain buffers. Some banks will need to continue to strengthen liquidity profiles,” it says.