have become highly important commercial product and could prompt certain institutions to slash their profit margins in order to win customer loyalty. yet, such practices contribute to rapidly pushing up property prices. thus, having observed that liquidity can disappear very rapidly, that central bank intervention must remain exceptional and that excessive maturity transformation increases systemic risk, a preventive approach is called for. such an approach should take into account two aspects : – i will start by discussing basel iii liquidity regulation, while stressing the fundamental goal : reducing liquidity risk and limiting maturity transformation. – nevertheless, whatever changes are made to the regulatory framework, this necessary but one - size - fits - all approach will still be inadequate if it is not accompanied, or even preceded, by new policies to manage maturity transformation by banks. bis central bankers ’ speeches i. an overview of basel iii liquidity regulation 1. a fundamental goal : preventing excessive maturity transformation risks since banks are in the best position to reduce information asymmetries in credit markets, select and monitor loans and diversify their asset portfolios, they are at the heart of maturity transformation activities. in traditional financial intermediation, banks collect savings and provide liquidity to the whole economy through transactions on their balance sheets. to do this, they transform liquid short - term liabilities into medium - to long - term assets with poor liquidity. this activity generates well - known risks, in particular in terms of interest rates and liquidity. maturity transformation is therefore subject to prudential regulation to ensure that basic security rules are followed. at the seoul summit in november 2010, the g20 leaders endorsed the basel iii framework that overhauls the current prudential regulatory regime. in particular, this is the role of the two new liquidity ratios : – the one - month liquidity ratio or liquidity coverage ratio ( lcr ) has the two - fold objective of preventing short - term liquidity shocks and requiring institutions to selfinsure against liquidity shortages in order to limit refinancing exclusively via the central bank. institutions should in no way consider that they have a guarantee of permanent access to such refinancing. in this respect, the use of foreign currency funding is not always justified by the need to fund assets denominated in these currencies in the absence of a sufficiently broad customer base in the countries concerned. such strategies are also used for arbitrage purposes. they contribute to overall market liquidity but they must remain of a magnitude that allows institutions

to unwind positions in stressed market conditions. however, during complete liquidity dry - ups some institutions became largely dependent on swap lines between central banks, as was the case from the end of 2007 to the start of 2010. it is also clear that the use of swap lines between central banks cannot be considered a natural market adjustment. in this respect, it is advisable for banking supervisors to have indicators that enable them to measure possible foreign currency mismatches, without necessarily imposing a specific currency matching requirement. – the one - year liquidity ratio or net stable funding ratio ( nsfr ), for its part, aims to limit the risk of excessive maturity transformation such as illustrated by the failure of northern rock. in practice, it is defined as the “ available amount of stable funding ” over one year divided by the “ required amount of stable funding ” for one year. the standard requires that the ratio be no lower than 100 %. 2. a observation period necessary to calibrate these ratios while the implementation of quantitative and harmonised rules at the international level represents a major step forward, the calibration of these proposed ratios is not without shortcomings. as regards the one - month ratio, the composition of its numerator must be reviewed, that is to say defining the high - quality liquid assets that are largely composed of government securities. the sovereign debt crisis has shown us that caution is required when assessing the degree of actual liquidity of certain debt instruments. conversely, equities, which remain liquid even under stressed market conditions, are not eligible for the numerator. furthermore, it is somewhat paradoxical that collateral eligible in normal times for central bank refinancing operations – i. e. excluding non - standard measures – is not considered to come within the basel definition of liquid assets and is not fully eligible for the numerator of the ratio. the one - year ratio raises many questions, including in terms of principles, in that it places major constraints on certain maturity transformation activities. also, can a one - size - fits - all bis central bankers ’ speeches approach be applied to institutions worldwide even though their business models vary from universal banking to specialised banking models ( investment banks, custodians, etc. )? the greatest attention will be therefore required when assessing the impact of this standard on the financing of the economy. to back up this somewhat critical observation, i would like to stress three points : • first, i wish to recall that central banks