Cash & Liquidity Management
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Redefining Global Liquidity: The Corporate Implications of Basel III

Redefining Global Liquidity: The Corporate Implications of Basel III

An Executive Interview with Andrew Linton, Head of Product Development and Jason Straker, Head of Client Portfolio Management, EMEA, J.P. Morgan Global Liquidity Group 

Why do corporate treasurers need to know about Basel III, given that it is a banking regulation?

Basel III redefines global standards for bank capital, liquidity and leverage, and will profoundly impact how banks manage their balance sheets. Given that a bank’s balance sheet is made up of loans to customers (its assets) and deposits (its liabilities), changes to a bank’s balance sheet have an impact on its customers, particularly in this case on institutional customers.

What are the key elements of Basel III that corporate treasurers need to be aware?

A key element of Basel III is the liquidity coverage ratio (LCR). This has been designed to ensure that a bank can meet its liquidity needs in a severe stress scenario. Specifically, banks need to hold a sufficient stock of unencumbered assets that can be converted into cash within a day, without a decrease in value to meet all of the bank’s liquidity needs over a 30-day stress scenario.

To achieve this objective, banks must hold more high quality liquid assets (HQLA) than the difference between their calculated net cash outflows and inflows under 30-day stress period. HQLA are categorised in different ways: for example, cash, central bank reserves, central bank assets and sovereign debt are ‘level one’ and must comprise at least 60% of total HQLA.