The Basel III Liquidity Coverage Ratio (LCR) is designed to ensure "that a bank has an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30 calendar day liquidity stress scenario," according to the Basel Committee's statement in January.
The LCR will be introduced in January 2015, with a 60% minimum, rising by 10% a year until January 2019, when the requirement will be 100%.
The LCR is specifically designed to prevent immediate funding blowups of the type experienced by Bear Stearns and Lehman Brothers. The required coverage of liquidity needs for 30 days will allow enough time for regulators to implement an affected bank's approved orderly liquidation process, or "living will," as required by Dodd-Frank.
In his report on May 3, Mosby called liquidity "an underappreciated survival tool" for large banks, and said that "by the end of 2008, our Large Cap Banks' coverage of a retail run on the bank had fallen below 100%."Of course, the government took very significant steps during the crisis to mitigate the risk of bank runs. The FDIC temporarily waived all limits on deposit insurance for most checking accounts, while eventually making permanent an increase in the basic deposit insurance limit to $250,000 from $100,000. According to Mosby, "the coverage ratio for a retail run on the Large Cap Banks has risen to above 150%, the highest level we have seen in the 2000s." A retail run on deposits is a banker's worst nightmare, and it has been a very rare event in the United States for quite some time, with the FDIC taking a lot of the credit. "Additionally, wholesale and institutional coverage ratios have improved from below 200% to around 400% today," according to Mosby. The most important liquidity measure for banks when trying to curtail systemic risk is "a wholesale or institutional run on the bank," Mosby wrote. "If a bank's wholesale or institutional coverage ratio falls too far and a bank's marketable assets begin to become less liquid, it could be forced to use the Fed to cover any significant loss of funding. Ensuring that the Large Cap Banks have excess liquidity is a component of getting the government out of making Large Cap Banks too Big to Fail."