The Basel III regime requires a significant departure from the established thinking and practices of banking regulation. Its signature feature, arising as a direct response to the experience of the recent global financial crisis, is the priority placed on liquidity management.

Setting an adequate standard for liquidity, and gauging compliance with that standard, requires new tools, new calculations, and a new, conservative attitude on the part of regulated financial institutions to assets and products which, while secure from a creditworthiness perspective, require a liquidity commitment. The new regulatory burden is lighter for Canadian banks, having avoided the worst of the financial crisis, than for their European and American cousins. The government-backed security of Canadian mortgage debt, for instance, and the highly concentrated nature of the banking sector in Canada somewhat reduce the need for rigorous liquidity oversight.

Notwithstanding this, we can anticipate that domestic banks will try to cut operating costs, increase their focus on term deposits and other liquidity-friendly products in their personal and commercial business lines, and possibly reconsider the prominent role ETFs have played in bank-branded investment strategies.

This paper – first presented at the Federated Press' Regulatory Compliance for Financial Institutions conference on April 29 and 30, 2014 – reviews the main components of Basel III, examines new liquidity standards and anticipates possible impacts on Canadian banks.

An Overview of the Implementation of Basel III in Canada

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