Beginning in 2018, banks will be required to have more liquid assets to cover their short term exposures to other banks and financial institutions, derivatives and assets used as initial margin for derivative contracts. The requirement, adopted by the Bank for International Settlements—termed the “net stable funding ratio”—will discourage banks from using short-term funding to cover long-term obligations. Essentially, banks will be required at all times to have cash or assets readily convertible to cash to at least fund their anticipated obligations for the next year time frame under ordinary operational conditions. According to BIS, this new requirement—which still needs formally to be adopted by individual jurisidictions' bank regulators—, as well as the liquidity coverage ratio adopted previously, are being implemented because “[d]uring the early liquidity phase of the financial crisis starting in 2007, many banks—despite meeting the existing capital requirements—experienced difficulties because they did not prudently manage their liquidity. …The rapid reversal in market conditions showed how quickly liquidity can dry up and also how long it can take to come back.”
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Basel Committee wants banks to have more liquid assets
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