The Basel Committee on Banking Supervision has issued a discussion document on the Liquidity Coverage Ratio and disclosure standards. We’ve got some comments but also wonder, how important is this document really at the current time? Is further LCR disclosure without more RWA disclosure a meaningful conversation?
Whatever else happens, the new consultation paper suggests that we will see substantially more disclosure from banks around their LCRs, even if the core problem of calculating RWA is not resolved.
Here are a few choice bits from our perspective:
– “Data must be presented as simple averages of daily observations over the previous quarter (ie the average is calculated over a period of, typically, 90 days).” No more fancying up the balance sheet at quarter end for reporting purposes. Many banks already take this approach but this just formalizes the matter.
– “Both unweighted and weighted values of the LCR components must be disclosed. The unweighted value of HQLA is to be calculated at market value.” Could this be a start at unraveling incompatible RWA calculations? It’s an interesting idea.
– The document gives substantial leeway to allow banks to disclose what they want to. The document specifies that “In addition to the common template, banks should provide sufficient qualitative discussion around the LCR to facilitate a greater understanding of the results and data provided.” However, it then lists many options for what could be disclosed but doesn’t require anything in particular. This opens up the door to disclose… pretty much nothing of substance.
– Related to the previous point, “Additional information that banks choose to disclose should provide sufficient information to enable market participants to understand and analyse any figures provided.” However, if banks aren’t disclosing the details of their RWA methodologies then this requirement becomes less valuable to understanding the LCR.
– This is interesting: “The additional quantitative information that banks may consider disclosing could include customised measurement tools or metrics that assess the structure of the bank’s balance sheet, as well as metrics that project cash flows and future liquidity positions, taking into account off-balance sheet risks, which are specific to that bank. Other quantitative information could include key metrics that management monitors, including, but not limited to:
(a) concentration limits on collateral pools and sources of funding (both products and counterparties);
(b) liquidity exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, taking into account legal, regulatory and operational limitations on the transferability of liquidity; and
(c) balance sheet and off-balance sheet items broken down into maturity buckets and the resultant liquidity gaps.”
As noted in our post last week on the 21st Century Glass-Steagall Act and the Vickers Act, detailing exposures at the entity and business unit level would show much more clearly where the risk lies and what separating business lines would mean for risk management in general. But this is still a consultative document so it is a bit of throwing ideas against a wall and seeing what sticks. Echoing our opinion on RWA, more detail is better than less, but it needs to be calculated a) consistently across banks and b) using the same methodology over time.
Here’s a link to the consultation paper.