Basel III – A government bond friendly latest and potentially final draft

- "Over the weekend the Basel Committee on Banking Supervision released its latest – and potentially final – draft proposal for the forthcoming Basel III solvency and liquidity framework. Both the solvency and liquidity frameworks have been watered down from the original proposals released last December, but are stricter than many had expected. From an interest rate market perspective, the overall conclusion is that the latest Basel III proposals are highly positive for government bonds: i) Banks are still required to accumulate a liquidity buffer primarily comprising government bonds; ii) While banks now face less immediate pressure to reduce short-term wholesale funding, the trend towards higher funding costs, wider lending rate spreads and lower “neutral” policy rates remains intact; iii) The decision to delay the implementation of the Leverage Ratio removes one potential constraint on the current asset allocation into government bonds by OECD banking systems."

Nomura Asian Interest Rate Strategy 20100913

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