LCR Fails to Recognize the True Liquidity Value of Many Instruments Currently Held by U.S. Banks

National Unrecovered Financial Services Association released a long-awaited report analyzing the Basel III 30-day liquidity standards (the Liquidity Coverage Ratio or LCR). The empirical study revealed that the LCR fails to recognize the true liquidity value of many instruments currently held by U.S. banks and could potentially inhibit the U.S. housing market recovery. The proposed standards will effectively redraw the structure of U.S. housing finance by discouraging the use of the Federal Home Loan Bank System and capping the credit for securities issued by Fannie Mae and Freddie Mac (the GSEs). NURFS's analysis indicates that simple changes to the LCR framework would create a more robust and accurate liquidity standard and help address a potential liquidity shortfall.