They usually have lower credit ratings and shallower government bond markets, which in some cases implies a lack of high-quality liquid assets (HQLA
), a lack of adequate collateral and so on.
While we continue to view the liquidity of the Islamic financial institutions that we rate as adequate on average, we think that Basel III implementation creates an opportunity for the industry to develop a new range of HQLA
to address the chronic lack of such instruments.
In addition, the buffers of HQLAs
held by the largest banking firms have more than doubled since the end of 2007, and their reliance on short-term wholesale funds has fallen considerably.
Credit rating agency Standard & Poor's, which believes that the IFSB revised capital requirements for Basel III could help to strengthen the Islamic finance industry, said in a recent report that the introduction of a LCR might address some of the industry's long-standing weaknesses, particularly the lack of HQLA
According to the Basel Committee, "[w]hile the LCR is expected to be met and reported in a single currency, banks are expected to be able to meet their liquidity needs in each currency and maintain HQLA
consistent with the distribution of their liquidity needs by currency." (186) Foreign banks are required to hold HQLA
in to accommodate net cash outflows in each currency and jurisdiction they have obligations.
Two categories of assets make up HQLA
. The first category, Level 1 assets, includes cash and other assets that may be easily converted to cash in a stressed situation (for example, statutory reserves and high-quality sovereign debt such as U.S.
The rule identifies high-quality liquid assets (HQLA
) to meet this requirement but fails to include municipal securities in any of the acceptable investment categories (despite including foreign sovereign debt).
However, we have concluded that the following factors provide sufficient certainty around the bank's ability to obtain timely liquidity through alternative channels to assign a P-1 rating to the program: (1) NBAD's substantial stock of Sterling high quality liquid assets (HQLA
), which we estimate to be multiples of the bank's expected Sterling obligations during any seven day period in a given year, (2) the bank's substantial stock of Euro HQLA
, which gives the bank access to a large pool of liquidity in the same time zone, and (3) the depth and size of the Sterling foreign exchange markets.
Its overall aim is to ensure that a bank has adequate stock of unencumbered high quality assets (HQLA
) which consists of cash or assets that can be converted into cash, a little or no loss of value in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario (Bank for International Settlements, 2014).
Regulatory proposals for a liquidity coverage ratio for Islamic financial institutions could help to address some of the industry's long-standing weaknesses, particularly the lack of high quality liquid assets (HQLA
), Standard & Poor's Ratings Services has said.
European Banking Authority (EBA) (2013), 'Report on appropriate uniform definitions of extremely HQLA
and on operational requirements for liquid assets', London, EBA.
The GHOS also endorsed the Committee's intention to publish further guidance on how national authorities can utilise market-based indicators of liquidity within their own frameworks for assessing whether assets qualify as High Quality Liquid Assets (HQLA
) under the LCR.