The Basel Committee's change to the liquidity coverage ratio thresholds in its capital adequacy rules will impact data management operations
In a November column, reacting to postponements both in the US and abroad concerning compliance with Basel III capital adequacy rules, I concluded that the Basel Committee on Banking Supervision, which drafted and updates these rules, should fill in some missing provisions to inspire worldwide confidence in the seriousness of the regulation.
Earlier this month, the Basel Committee did so, lowering the liquidity coverage ratio (LCR) thresholds that banks and financial firms must meet to ensure their survival should they face another crisis. Some observers and critics might say the committee has filled in those blanks with details that undermine the strength of Basel III.
One criticism is that the reduction of the liquidity thresholds does not mean that financial institutions will end up being more liquid, and therefore make more loans. "If you suddenly are more liquid, you may just transact more derivatives or make other kinds of investments," says Mayra Rodríguez Valladares, managing principal of consultancy MRV Associates. "There's no guarantee that this will [mean more] mortgage loans for Middle America."
The most prominent changes in Basel III place corporate debt securities and mortgage-backed securities with certain ratings in the high-quality liquid assets category, as well as only requiring banks to be able to survive the departure of 20% of certain non-operational deposits, rather than 40%. Another change lowers the percentages for other categories of deposits and credit facilities, as well as derivatives.
The liquidity threshold sets the level where firms have to manage their risk appetite. "Depositors with CDs and money markets are a fairly reliable source of internal funding," says Sinan Baskan, vice-president, capital markets, global banking at technology provider SAP. "If you're supposed to respond to a scenario where those aren't available, there's a lot of the other side of the business where you thought you could do riskier investments and still have to cut down this profile, or increase reserves or capital adequacy standards."
Danger lurks in the inclusion of riskier securities in the threshold, according to Valladares. "It's a lot of smoke and mirrors," she says. "You may look like you're liquid, but if there's a big decline in your stocks and MBSs, there goes your liquidity."
Paradoxically, for data management purposes, the liquidity threshold changes could make data more complex and difficult to deal with, as Baskan describes. "The technology they use to come up with the right numbers, like analytics and computations that give the management the insight, is going to depend on both having more data available and having a high refresh rate for that data," he says. "That really has to be up-to-date. That's a lot of new data coming in. The calculations have to be fairly fast and robust if there are more of them and they're more complex. You need speed in computation, data capture, data consumption and actual raw calculation speed. It's a lot of pressure to upgrade the tech infrastructure to collect the data and manage it."
If, as Vallares also says, the LCR has now been "watered down," some of that excess is likely to now flow to data management operations, which will have to get some more buckets ready.
More from Inside Reference Data
Updating your subscription status
Inside Market Data & Inside Reference Data Awards 2015
The reader survey and the call for entries for the 13th annual Inside Market Data Awards 2015 & Inside Reference Data Awards 2015 are now open. These awards recognize industry excellence within market data, reference data and enterprise data management. Submit your entries here. To vote in the reader survey, click here.
The catalyst for change in client reporting is a more empowered, digitally aware consumer. Excellence of service delivery will be key to investment managers...
Without a consistent source of data and limited functionalities in existing systems, firms are unable to perform tasks that are becoming increasingly important...