These regulations were imposed to negate liquidity risks of banks that played a prominent role in financial crises.
[2] Over time there was a vast increase in the creation of so-called cash equivalent instruments, which were supposedly safe, short-term, and liquid, but eventually resulted in poorly underwritten subprime mortgages - a classic adverse feedback loop ensued.
These HQLA consist of cash, central bank reserves and government bonds to cover net outflows of liabilities under two specific stress scenarios, lasting 14 days and 3 months respectively.
≥ 100% In this case, the ‘available stable funding’ is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year.
[4] In short, the NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.
[2] The difference between the two is that the LCR is specifically designed to improve the short-term resilience of banks against liquidity shocks and the NSFR, on the other hand, is designed to limit the risks emanating from excessive maturity mismatches over the medium to long term [5] There is some debate on the impact of the LCR and NSFR, since they can at most constrain maturity mismatches within the banking system.
The underlying economic core reasons why money suppliers want liquid funds and borrowers want longer-term loans are not changed by these regulations.
It is therefore a matter of time until alternative methods of liquidity and maturity transformation will be developed that may result in the next financial crisis.