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Basel III F: Callable Commercial Paper

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Abstract

One of the Basel Committee on Banking Supervision's responses to the global financial crisis of 2007-09 was to introduce the Liquidity Coverage Ratio (LCR), a short-term measure that evaluates whether a bank has enough liquidity to meet expected cash outflows during a 30-day stress scenario. One area in which this incentive has already resulted in changed practices is in the market for commercial paper. Banks often provide backup liquidity facilities to the issuers of commercial paper that the issuers can draw upon to repay a maturing issue of commercial paper if they are unable to sell a new issue to do so. To avoid such draws occurring within the 30-day LCR window, banks have developed commercial paper that features a call provision enabling issuers to redeem the commercial paper prior to the start of the window. This case considers the implications of the emergence of callable commercial paper and whether this development introduces additional risk into the financial system.

Suggested Citation

  • Metrick, Andrew, 2019. "Basel III F: Callable Commercial Paper," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 1(4), pages 101-110, March.
    • Handle: RePEc:ysm:ypfsfc:1488
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    References listed on IDEAS

    as
    1. Dusan Stojanovic & Mark D. Vaughan, 1998. "The commercial paper market: who's minding the shop?," The Regional Economist, Federal Reserve Bank of St. Louis, issue Apr, pages 5-9.
    2. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
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    More about this item

    Keywords

    Liquidity Coverage Ratio; Basel III; BIS; BCBS; Global Financial Crisis; Callable Commercial Paper; Securities Law;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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