Global banking regulators met over the weekend to contemplate proposed new liquidity requirements for global banks, and mechanisms to ensure the new minimum standards imposed by the Basel III capital regime are adopted equally by local regulators.

The oversight body of the Basel Committee on Banking Supervision, known as the Group of Governors and Heads of Supervision, met to discuss the committee’s proposals for imposing a liquidity coverage ratio (LCR) on banks, and its strategy for assessing implementation of the Basel regulatory framework.

The regulators reiterated that the central principle underlying the proposed LCR is to ensure that banks have a stable funding structure, and a stock of high-quality liquid assets that should be available to meet its liquidity needs in times of stress.

“Once the LCR has been implemented, its 100% threshold will be a minimum requirement in normal times. But during a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” they note, adding that they have asked the Basel Committee to clarify the LCR rules to state explicitly that liquid assets accumulated in normal times are intended to be used in times of stress. It has also been asked for additional guidance on the circumstances that would justify the use of these assets.

The GHOS also reaffirmed its commitment to introduce the LCR as a minimum standard in 2015, and it expressed support for the Basel Committee’s plans to finalize key aspects of the LCR. It directed the committee to finalize, and subsequently publish its recommendations in these areas by the end of 2012.

“The aim of the Liquidity Coverage Ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets such that central banks are asked to perform only as lenders of last resort and not as lenders of first resort. While the Liquidity Coverage Ratio may represent a significant challenge for some banks, the benefits of a strong liquidity regime outweigh the associated implementation costs,” said GHOS chairman, and governor of the Bank of England, Mervyn King

On the subject of implementing the new Basel regime generally, the GHOS also endorsed the Basel Committee’s approach to monitoring and reviewing implementation. The Committee intends to monitor, on an ongoing basis, the status of countries’ adoption of the Basel rules. It will review the compliance of national rules and regulations with the international minimum standards in order to identify differences that could raise prudential concerns, or worries about ensuring a level playing field. It will also review the measurement of risk-weighted assets to ensure consistency across banks and jurisdictions.

Each Basel Committee member country has committed to undergo a detailed peer review of its implementation of all components of the Basel regulatory framework. And, it plans to publish the results of those assessments. The initial peer reviews are to assess implementation in the European Union, Japan and the U.S., and they will start in the first quarter of 2012.

“The focus on implementation represents a significant new direction for the Basel Committee. The level of scrutiny and transparency applied to the manner in which countries implement the rules the Committee has developed and agreed will help ensure full, timely and consistent implementation of the international minimum requirements,” said King.

“Raising the resilience of the global banking system, restoring and maintaining market confidence in regulatory ratios, and providing a level playing field will only be achieved through full, timely and consistent implementation,” stressed Stefan Ingves, chairman of the Basel Committee and governor of the Swedish Riksbank.