EU Banks May Get Asset-Backed Security Leeway in Liquidity Rules
As we found in the Global Association of Risk Professional (GARP) news story above, the EU regulators are set to permit banks to count ABS bonds within liquidity requirements.
But this is precisely how Lehman Brothers failed in 2008 !!!
Of course, there is a long story one may tell about the failure of Lehman. See the exhaustive and authoritative report of the Examiner for the Lehman Bankruptcy. There are many investigatory paths to follow in the analysis of complex institutions such as Lehman.
But if one had to identify the dominant failure mechanism and to state in a simple yet accurate manner, here it is:
Lehman failed due to its stuffing its "liquidity pool" with (what it called) investment-grade ABS which, in crisis, were illiquid, mis-priced, and otherwise unacceptable as collateral to any lender that took the trouble to review the bonds.
See here one brief discussion of Lehman's Liquidity Pool "own goal."
Does the EU truly wish to replicate Lehman in Europe?! Whether in time of Crisis or not, ABS bonds - regardless of credit rating - are not liquid!
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