In their effort to prepare for the various capital requirements that will be set forth by Basel III, banks looking to obtain funding sources over a short-term time span have started selling callable commercial paper, according to a recent report released by Fitch Ratings.
A major reason that these lending institutions are engaging in this action is to lower the risk that they will incur higher liquidity back up costs due to Basel III, according to the credit ratings agency. Selling callable debt allows banks to circumvent this problem and avoiding potentially higher expenses, since these securities do not need to be backed up by liquidity.
This happens as U.S. federal regulators scramble to determine what their final interpretation will be for the capital guidelines that have been created for global lending institutions by the Basel Committee on Banking Supervision. One aspect they must determine is what securities banks will be able to use toward the liquidity capital ratio.
What financial instruments can be used toward meeting this requirement could have an impact on the aforementioned issuance of callable commercial paper that has been noted by Fitch, as many banks have been altering the costs of their liquidity facilities in their efforts to meet the LCR before it is required that they do so by federal regulators.
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