Yet, such practices contribute to rapidly pushing up property prices. Thus, having observed that liquidity can disappear very rapidly, that central bank intervention must remain exceptional and that excessive maturity transformation increases systemic risk, a preventive approach is called for. Such an approach should take into account two aspects: –  I will start by discussing Basel III liquidity regulation, while stressing the fundamental goal: reducing liquidity risk and limiting maturity transformation. –  Nevertheless, whatever changes are made to the regulatory framework, this necessary but one-size-fits-all approach will still be inadequate if it is not accompanied, or even preceded, by new policies to manage maturity transformation by banks. BIS central bankers’ speeches  1  I. An overview of Basel III liquidity regulation  1. A fundamental goal: preventing excessive maturity transformation risks  Since banks are in the best position to reduce information asymmetries in credit markets, select and monitor loans and diversify their asset portfolios, they are at the heart of maturity transformation activities. In traditional financial intermediation, banks collect savings and provide liquidity to the whole economy through transactions on their balance sheets. To do this, they transform liquid short-term liabilities into medium- to long-term assets with poor liquidity. This activity generates well-known risks, in particular in terms of interest rates and liquidity. Maturity transformation is therefore subject to prudential regulation to ensure that basic security rules are followed. At the Seoul Summit in November 2010, the G20 leaders endorsed the Basel III framework that overhauls the current prudential regulatory regime.
In practice, it is defined as the “available amount of stable funding” over one year divided by the “required amount of stable funding” for one year. The standard requires that the ratio be no lower than 100%. 2. A observation period necessary to calibrate these ratios  While the implementation of quantitative and harmonised rules at the international level represents a major step forward, the calibration of these proposed ratios is not without shortcomings. As regards the one-month ratio, the composition of its numerator must be reviewed, that is to say defining the high-quality liquid assets that are largely composed of government securities. The sovereign debt crisis has shown us that caution is required when assessing the degree of actual liquidity of certain debt instruments. Conversely, equities, which remain liquid even under stressed market conditions, are not eligible for the numerator. Furthermore, it is somewhat paradoxical that collateral eligible in normal times for central bank refinancing operations – i.e. excluding non-standard measures – is not considered to come within the Basel definition of liquid assets and is not fully eligible for the numerator of the ratio. The one-year ratio raises many questions, including in terms of principles, in that it places major constraints on certain maturity transformation activities. Also, can a one-size-fits-all  2  BIS central bankers’ speeches  approach be applied to institutions worldwide even though their business models vary from universal banking to specialised banking models (investment banks, custodians, etc.)?