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How do new liquidity rules affect banks?

The Basel committee has announced new easier liquidity requirements for banks. “These changes create a better environment for banking,” says SEB’s Chief Financial Officer Jan Erik Back.

The final proposal announced on Sunday concerns LCR (Liquidity Coverage Ratio), which determines how much liquidity banks must maintain in order to manage a stressed scenario for 30 days. Banks will eventually be required to have enough liquidity to cover 100 per cent of their needs for 30 days.

The changes proposed on Sunday do not affect the goal of 100 per cent liquidity coverage, but instead focus on methods for calculating the LCR. Banks are now allowed to use more assets when calculating their liquidity reserves. Furthermore, and more importantly for corporate banks like SEB, there are changes to assumptions used in stress testing.

According to the original proposal, deposits from private individuals were considered stable while deposits made by companies were considered less stable in a stressed scenario. Banks would have had to assume that 75 per cent of company deposits would disappear during one month in a stressed scenario. In the new proposal, that figure is 40 per cent.

“It is a welcome and logical change. As a corporate bank, we have significant deposits made by companies and we see that they are as stable as other deposits. But, since January 1, we have tougher rules in Sweden,” Jan Erik Back says.

The Basel committee suggests that the new rules be implemented starting in 2015 and that banks must reach 100 per cent LCR four years later.

Sweden has decided to move faster, meaning that banks must have an LCR of 100 per cent already this year. SEB has already achieved this ratio. Additionally, Sweden’s rules are based on the original proposal from the Basel committee.

It is still uncertain when, if and to what extent Swedish authorities may adapt to the easier rules proposed by the Basel committee.