Edition 2 of the SCM Briefing contained a Feature on the Basel Committee's revised iteration of the Liquidity Coverage Ratio (LCR) under Basel III, which welcomed the inclusion of residential mortgage-backed securities (RMBS) within the definition of High Quality Liquid Assets (HQLAs) (albeit at Level 2B and capped at a maximum of 15% of HQLAs). In seeking to implement the Basel III framework via the Capital Requirements Directive IV and Regulation (CRD IV / CRR), the European Banking Authority (EBA) has released a Discussion Paper which invites comment on its proposed methodology for assessing which specific assets will be suitable for inclusion in the definition of HQLAs under the CRD IV's LCR provisions. The EBA will measure the liquidity of all assets based on the fundamental liquidity metrics already set out in the CRR: trading volume, outstanding amounts, bid-offer spread and price stability. Specifically in relation to RMBS (and interestingly, ABS, which the Basel Committee does not mention at all within the LCR), the EBA notes that certain 'explanatory characteristics' of these instruments will be factored into the EBA's liquidity assessments, such as the type of underlying assets, senior vs junior tranches, percentage of public placement, characteristics of the underlying asset pool and any risk-retention. The fact that the EBA envisages that other securitised assets beyond RMBS may be eligible for inclusion within the LCR (at least within Europe) is a welcome development.
EBA Discussion Paper