HKMA to consult banks about phases-in LCR

Wants banks not to weaken liquidity to comply with Basel III.

The Hong Kong Monetary Authority issued this warning after a recent announcement by the Basel Committee that banks could adopt a staggered liquidity coverage ratio (LCR) in which 60% of the buffer to be met by 2015 can be phased in at 10% increments until 2019.

The LCR requires banks to hold enough high quality liquid assets to cope with a 30-day stress period. The Level 1 portion, which comprises 60% of the LCR, requires banks to hold mainly cash and government bonds. Level 2 allows banks to hold highly rated corporate bonds and covered bonds up to 40%.

The list of eligible LCR assets has been expanded to include a level 2B portion that can form a maximum of 15% of all liquid assets. This includes corporate debt securities rated A+ to BBB– and certain unencumbered equities subject to a 50% haircut, and certain residential mortgage-backed securities rated AA or higher with a 25% haircut.

Individual regulators such as HKMA, however, can adopt a stricter approach than suggested by the Basel Committee and HKMA apparently wants to take this tack. Reports said HKMA will first consult banks on new LCR this quarter and assess level playing field implications before deciding on whether to adopt a phased approach

"If ultimately we decide to adopt phase-in of the LCR requirement, we would nevertheless expect banks not to materially weaken their liquidity positions during the phase-in period in order to take advantage of phased implementation,” said HKMA.

“Even if we adhered to the original timetable, we would not expect major problems for banks in Hong Kong to comply with a 100% LCR requirement by 2015 although some may need to adjust their liquidity profiles or the composition of their liquid assets."