In the wake of the 2008 financial crisis, the Basel Committee promised to develop global liquidity requirements as a crucial protection against financial instability. The crisis had been triggered by a liquidity failure; a key element of the global regulatory response was to insist that banks hold a buffer of liquid assets. Now the Committee has effectively gutted this requirement, delaying its implementation by four years and designating an astoundingly wide range of assets as supposedly “liquid.”
International regulators have also stated that they will require banks to use more stable sources of liquidity funding, as a complement to the liquidity buffer. But their failure to pass effective rules on liquidity buffers casts serious doubt on that commitment, too.
In sum, more than four years after the crisis, international regulators are floundering for answers and seem unable to take on the special-interest might of the financial sector. Along with the weak provisions on capital under international rules, this decision on liquidity bolsters the case for U.S. regulators to add tougher requirements on top of the Basel framework, in order to do what is necessary to ensure the safety of the U.S. banking system.