The European Central Bank is pushing for easier requirements in the Basel III liquidity reserves mandate so that certain mortgage-backed securities and business loans may qualify in lieu of the currently proposed all-cash liquidity rule.
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A draft of the liquidity coverage ratio (LCR) would place too much pressure on lending and would make it more difficult for banks to implement their monetary policies. This was the assessment of the Basel Committee on Banking Supervision.
The current draft of requirements was drawn as an effort to prevent another financial crisis like 2008.
The committee made the point that central banks have had to relax their requirements a bit to provide the help needed in the Eurozone. This has made the Basel III requirements out of alignment with the realities central banks are facing.
The ECB has become concerned about its ability to sufficiently manage liquidity in the money markets in carrying out its monetary policies. Strict adherence to the Basel III requirements at this point would hinder that process significantly.
There is also a concern that banks would hoard highly liquid assets
in their efforts to comply. This would shrink liquidity in the money markets and hinder short-term funding capabilities.
The Basel committee also said last year that banks should be able to draw on their reserves during times of stress in the markets. Just how and when this type of breach would be acceptable is a work in progress. The Basel III requirements are currently scheduled to go into effect in 2015.