We know that the LCR can be volatile during times of liquidity stress and market volatility, with changes in the ratio not necessarily reflecting a bank’s true liquidity position. Indeed, it is possible for the LCR to fall relatively more sharply than HQLA. For example, under the historical Lookback Approach (HLBA) methodology, when a bank faces an unusual outflows of derivatives variation margin, net outflows can increase while HQLA falls. [30] Another issue is banks’ potential market obligations to notify debt investors in the event of LCR falling below 100%, due to local capital market transparency regulations. In addition, discussions with firms highlight concerns that if banks report a fall in their LCR they may get a credit rating downgrade. This is despite the fact that LCR plays a fairly limited role in the methodologies of most credit rating agencies, which typically consider a much wider set of information. [31] Nonetheless, fears of adverse market reaction appear to induce banks to seek to quickly rebuild their LCR levels, in the event that the levels do fall. Concerns around disclosures may be especially problematic for banks that disclose spot (rather than average) LCR levels, due to the greater volatility and sensitivity of spot LCR rates compared to an averaged metric. Basel III policymakers were aware of this risk. This is why Basel requires disclosure of average LCRs only. However, in some jurisdictions, including the EU and UK, some banks voluntarily disclose their spot LCRs. Fourth, there is uncertainty about the future.
Muhammad bin Ibrahim: Insights from the financial market in 2015, expectation and direction going forward Opening speech by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Annual Dinner of Persatuan Pasaran Kewangan Malaysia (PPKM), Kuala Lumpur, 13 November 2015. *  *  *  This annual dinner is an important event for it presents an opportunity for us and the market to reflect upon all the challenges in the financial market, and draw lessons as we move into the new operating year. The year 2015 has been a very interesting year for all of us here, industry players and regulators alike. During the year, we witnessed significant capital outflows as markets responded to the global economic developments. In particular, every commentary or data release hinting at policy normalization in the US was met with gyrations in financial markets. Emerging currencies, felt the brunt of such volatility, especially commodity exporting countries given the significant decline in commodity and energy prices and moderation in growth for the China’s economy. For Malaysia, we saw ringgit weakened as much as 18%, while in the bond market, we saw relative stability even though yields went up by 30 to 50 bps given by the negative sentiment in the domestic and global markets. Insights from the financial market in 2015 In the midst of all the global economic uncertainty and financial market volatility, I would like to highlight some observations and comments.