When setting up these transactions, firms should be prepared for questions from supervisors about the substance, as well as form, of their proposals. Treatment of liquid assets. Similarly, the letter of the regulation allows firms to account for the value of the liquid assets in their liquid assets buffer on a "hold to maturity" basis rather than on a trading basis, under which their reported value would be updated daily in line with market conditions. This is an important concession for firms who do not have a trading book but it means that market value gains and losses on the portfolio remain undeclared until the assets are sold. This practice raises the risk that – especially if gilt yields should rise – market price movements in liquid assets buffers could lead to unrealised losses. If this were to happen then the firm may be unwilling or unable to sell the assets. For which firm would want to sell liquid assets and declare unrealised losses at a time of liquidity stress? If the firm has access to the repo market, it may be able generate liquidity through repo. But there may be limited liquidity available in the repo market, so the liquidity of the liquid assets buffer would be impaired. Of course, if the assets in the liquid asset portfolio concerned carry very low risk, and their possible market value changes are small, "hold to maturity" accounting should not be of any concern to a well-run firm or a well-informed supervisor.
The appropriate level of risk is something we are currently discussing with firms. Liquidity horizon. Finally, we are aware of banks seeking out funding that matures just beyond the time horizon used to calculate regulatory liquidity requirements. These include the Liquidity Coverage Requirement’s (LCR) 30-day window. If a firm subject to the LCR accepts a deposit that can be withdrawn by giving less than 30 days’ notice, it has to hold a certain amount of high-quality liquid assets as insurance against the deposit being withdrawn during stress. As yields on high-quality liquid assets are relatively low, this can drag down profitability. But a bank can evade this by obtaining a deposit that matures after 30 days, since these deposits generate no requirement for counterbalancing high-quality liquid assets. I recently saw a term-sheet for an evergreen 35-day call account. In previous times, the market-standard notice period was one calendar month. Why the shift from one-month to 35 days? The traditional one-calendar-month call account is only sometimes LCR-friendly – during a 31-day month – whereas the new 35-day product always is. 21  All speeches are available online at www.bankofengland.co.uk/speeches  21  But how much additional liquidity has been obtained by extending the funding profile by five days? And how strong is liquidity risk management beyond the narrow requirements of the LCR?