Coming off life support

6 April 2009 By Chris Hughes

Central banks can t provide emergency liquidity to the banking sector forever. But liquidity regulation is needed as the life support ends. A framework is due by 2010. Expect it to force banks to raise deposits and tie up assets in lowyield, liquid securities, says Chris Hughes.

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The Group of Twenty nations (G20) said a global framework promoting stronger liquidity buffers at financial institutions should be agreed by the Basel Committee on Banking Supervision (BCBS) and national regulators by 2010.

The commitment came in a G20 manifesto, Declaration on Strengthening the Financial System, published alongside the group's final communiqué from April's London summit.

The BCBS published 17 principles to guide liquidity regulation in September 2008. In December, the UK Financial Services Authority issued detailed proposals for a new bank liquidity regime.

US authorities has said stronger regulation of bank liquidity is required, without setting out concrete proposals.

PricewaterhouseCoopers, the administrator to the European operations of Lehman Brothers, the collapsed Wall Street bank, called for banks to be forced to hold more liquidity within local subsidiaries.

You've just got to have some assets held locally that you can rely on, said Steven Pearson, partner at PwC, in comments to the Financial Times. [Lehman Europe] wasn't a UKregulated bank; there was no bailout fund ready. Holding local liquidity … would have made a lot of difference.

Context News

The commitment came in a G20 manifesto, Declaration on Strengthening the Financial System, published alongside the group's final communiqué from April's London summit.

The BCBS published 17 principles to guide liquidity regulation in September 2008. In December, the UK Financial Services Authority issued detailed proposals for a new bank liquidity regime.

US authorities has said stronger regulation of bank liquidity is required, without setting out concrete proposals.

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