The committee made clear to the European Union in a note this week that its interpretation on covered bonds as the best type of high quality liquid assets was materially different from its Liquidity Coverage Ratio (LCR) rules and that the EU’s extension of the label to all types of asset backed securities — and not just mortgages — was a potentially material deviation.
The EU’s response to the release was polite but pretty firm: covered bonds and ABS are important aspects of European funding and will continue to be so.
In fact the EU considers covered bonds so important that the beneficial treatment of the product might be extended to the Net Stable Funding Ratio (NFSR), where they are treated less favourably than senior unsecured bonds.
Europe has also spent almost two years finalising its simple transparent securitization (STS) framework, which is designed to lead to more favourable treatment for ABS under European regulations.
In this light, the chances of the EU changing its position on the liquidity treatment for covered bonds and ABS are next to none.
Global liquidity is also difficult to codify, given that the most-liquid product in any market is the one which is best bid at any given time.
The American Bankers Association has also criticised the LCR and NSFR measures laid out in Basel III and in March encouraged the US Treasury to lead a review of these liquidity standards to “ensure that they suitably fit US conditions and markets, including consideration as to whether the appropriate purposes of liquidity standards can be effectively met with less complexity”.
If Europe sets its own liquidity provisions and the US follows suit by determining its own rules, and other jurisdictions can also cherry-pick what to comply with in order to suit their own geographic markets, then really what is the point of Basel setting up these measures in the first place?