Quantitative study of the effects of implementing Basel III liquidity guidelines in Israel
The banking corporations were asked to conduct the QIS in accordance with a first draft of the guidelines—which is in line with the guidelines issued by the Basel Committee—that was distributed to them with the QIS. An updated version of the guidelines on this issue will be produced after an assessment and analysis of the possible effects of implementing the guidelines in the banking system.
Basel III refers to the international framework which was formulated on the basis of the lessons of the global crisis which occurred in 2007–09, and the weaknesses which became evident in banking systems worldwide. Adopting the Basel III recommendations fits in with the longstanding work of the Banking Supervision Department to strengthen the resilience of Israel’s banking system, to improve the quality of capital and liquidity and the measurement of risks, and to implement advanced international standards.
Within this framework, Basel III includes, for the first time, 2 detailed international standards for measuring the minimum liquid assets that a banking corporation must hold, and the banking corporation’s liquidity position:
- One standard is a short-term liquidity indicator—the Liquidity Coverage Ratio. The standard reflects the extent of liquid assets that a banking corporation must hold relative to its total forecasted liquidity needs over the coming 30 days, under a stress scenario. The liquidity needs are measured by, among other things, allocating to each type of funding source minimum withdrawal rate, reflecting the risk to the withdrawal of the sources from the banking corporation. In this manner, the liquid assets of each banking corporation are brought in line with the composition of its funding sources.
- A second standard is a structural (long term) liquidity measure—the Net Stable Funding Ratio. The standard reflects the extent to which the corporation’s activities (excluding short term activities) are funded by stable funding sources. This standard has not yet been finalized by the Basel Committee, so at this point it is not included in the QIS.
The Liquidity Coverage Ratio is expected to be implemented gradually in Israel, beginning in January 2015, over 4 years. (A ratio of 60 percent will have to be met in January 2015, and will increase by 10 percentage points each year to January 2019, when a liquidity coverage ratio of 100 percent will be required.)
The Supervisor of Banks, David Zaken, said, “Although the banking system in Israel displayed resilience during the recent global crisis, we have to be smart enough to learn from the lessons of the crisis, so that the banking system will continue meeting the top international standards, and continue to serve as a stable and central channel for economic growth. The implementation of the liquidity part of the Basel III Framework is an important further step toward achieving this goal.”