In conjunction with the new global capital standards, the Basel Committee has issued new liquidity requirements. While final in many respects, the liquidity-risk framework is subject to considerably more revision as it is implemented than the capital ones, reflecting both the dramatic impact these rules will have and their largely untested nature.  Although most public attention has focused on the new capital standards, the liquidity rules will have at least as much bank and market impact, possibly forcing institutions to raise an additional trillion-plus dollars in funds from sources such as sovereign governments.  While regulators hope this will prevent a repeat of the liquidity crisis that precipitated the current global financial debacle, doing so will significantly alter financial markets and contribute to the drag on profitability resulting from the capital standards. Significant asset restructuring could ensue, since the need to better match assets with liabilities of comparable term will make it more difficult and/or costly for banks to hold longer-term assets on their balance sheets. The liquidity standards will also require considerable operational effort and could result in unintended consequences – e.g., incentives for banks to hold more sovereign and/or bank debt (even though these can be risky obligations) or incentives for banks to drop certain liquidity facilities that are not given credit in the new framework.

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