Edited by Thorsten Beck - Vox

VOX Research-based policy analysis and commentary from leading economists
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critical ratio, the net funding ratio. This omission has caused shock and concern,
leading the ECB board to demand an explanation of the Commission’s intentions.
• The introduction of these standards has been considerably delayed, with the liquidity
coverage ratios not scheduled for some years, and the net funding ratios postponed
for much longer. It is extraordinary that no European-level prudential measure
will be in place for so many years.
• Even the definition of these ratios has not yet been agreed. The definition of the
net funding ratio standards is particularly controversial, and likely to be seriously
weakened.
• The buffer measures (liquidity coverage ratios) would require the creation of massive
buffers given the current highly mismatched bank funding. These are seen as
very costly, and there is an issue of insufficient forms of safe liquid assets to invest
in anyway. Under current rules any Eurozone sovereign debt would qualify as a
buffer, a curious prudential solution in the midst of the Eurozone sovereign debt
crisis.
A key strategic choice
How, then, can regulators introduce prudential measures on liquidity risk that will be
effective but not too onerous? The measures must also be introduced earlier than 2019
without disruption to be politically feasible.
A concrete solution, based on broad academic consensus, would be as follows.
Central banks have, during two years of Basel III negotiation, defined desirable liquidity
positions in terms of standard ratios. These may be introduced as long-term targets,
next to less demanding standards to be implemented immediately.
Banks may choose not to comply with the (higher) desirable standards because
of individual circumstances or business model choices. In that case, they would be