Liquidity rules

The Reserve Bank of New Zealand has “become the first authority to pass hard-and-fast rules for liquidity since the crisis”, writes The Economist in an article called ‘Lord of the Ratios’. Locally incorporated banks will be expected to meet a trio of specific funding ratios within a couple of years. Two “mismatch” ratios are designed to ensure that banks have enough cash and liquid assets readily available if creditors suddenly come calling. The third measure, a “core funding ratio” (CFR), is more novel. At least 75 per cent of banks’ total lending will have to be funded with stickier liabilities such as retail deposits and wholesale borrowing maturing in more than a year. A one-size-fits-all rule may also make more sense for New Zealand’s homogenous banks than for other countries.