EU bank regulator to create liquidity ranking for assets

In yet another example of the substitution of the combination of complex rules and regulatory oversight for the combination of transparency and market discipline, EU bank regulators are going to create a liquidity ranking for assets held by a bank.

Bloomberg reports that the European Banking Authority will start ranking assets by their liquidity in an effort to assure that banks have adequate liquidity to protect themselves from a sudden loss of short-term funding.

Regular readers know this whole exercise is not needed if the banks are required to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details.

With this information, market participants, including the bank regulators, can exert discipline on the banks to maintain adequate liquidity.

Europe’s top banking regulator will start ranking financial assets in order of liquidity as it implements international rules to protect banks from a sudden loss of short-term funding. 

The European Banking Authority will create a “scorecard” of asset liquidity, the agency said in an e-mailed statement, as part of requirements that banks hold a buffer of assets, known as the Liquidity Coverage Ratio, they can quickly sell to survive a 30-day credit squeeze. 

The EBA’s analysis will also “identify the features that are of particular importance to market liquidity” and report to the European Union’s executive body, the regulator said....

Regular readers might recall that the EBA was the bank regulatory authority that determined that the disclosures made by opaque, toxic subprime mortgage-backed securities were adequate for banks to know what they own.

Given this history, there is zero reason to believe that the EBA is capable of identifying the features that are important for liquidity or creating a useful asset liquidity scorecard.

The LCR is part of an overhaul of global financial rules, known as Basel III, intended to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Please note the substitution of the combination of complex rules and regulatory oversight that failed to prevent the financial crisis for the combination of transparency and market discipline that protected the sectors of the financial system that did not freeze during the financial crisis.