Cut and paste - your guide to "economic" vs "regulatory" liquidity Are you a bank agonising over whether to keep your triple A-rated covered bonds as part of your liquidity buffer or send them to the European Central Bank? Not sure what to do with your AA-rated non-financial euro corporate debt? Then you need this handy table from BofAML's structured finance guru, Alexander Batchvarov. Click to enlarge: The chart shows haircuts for various assets under the Basel Committee's newly proposed liquidity coverage ratio (LCR) rules and under the ECB's multitude of haircuts for its generous repo operations, plus effective yields. We've no doubt it will come in handy for certain bank treasurers. But for us lay-people types there's really just one key takeaway; deciding what assets go where is an exercise in maximising returns as much as one's regulatory capital. An LCR buffer built of AAA and AA-rated sovereigns, AA corporate bonds and AA RMBS will probably generate a higher net yield for a bank than say, a portfolio of AAA and AA-rated govvies, AA corporate bonds and single A corporates. It will definitely be higher than a portfolio of triple-A government debt, AAA covered bonds and single A corporates. To that end, here's a bit of comment from Batchvarov: The extension of the compliance period for LCR poses a difficult problem to banks, which are already compliant with the existing LCR requirements, as it reduces their NIM [net interest margin]. This illustrates the early mover disadvantage, and may discourage early compliance with new regulations. For such banks, the options are: Reduce LCR compliance to the new target of 60% and rebuild it to 100% by the new compliance date of 2019. Such action may help the banks realize capital gains given price movements in the last few years in Europe, but may pose question about the availability of eligible assets in the future and their yield  Reduce LCR compliance to 100% now or at any point before 2015 and invest excess elsewhere. Maintain LCR compliance and seek yield elsewhere to boost NIM  trade some of the excess regulatory liquidity for NIM assets - a reverse version of the liquidity swap of yesteryear. Hey Basel Committee - can you say unintended consequences? Related links: A guide to the liquidity coverage ratio for whingers - FT Alphaville The FSA takes pre-emptive action on liquidity swaps - FT Alphaville