Probably the most scary period of the GFC (to date) was after Lehmann Brothers collapsed and the GFC became a global liquidity crisis. To try and avert future liquidity crises regulators have been working hard to ensure that financial institutions will in future hold higher levels of liquid assets. Not quite back to the days of SRDs and LGSs (statutory reserve deposits and liquid and government securities requirements for those too young to remember) but among the requirements is that banks hold a level of liquid assets sufficient to cover 30 days required liquidity. Assets allowed under the regulations include cash, central bank deposits and government securies among other assets (see the article here from Risk magazine for a good description). The liquidity requirements are supposed to come into full force in 2015. The requirements are already creating some difficulties for countries like Australia where government bonds don’t exist in sufficient quantity. But a question I have is what happens when a Euro country defaults (which is quite likely to be before 2015)? It looks to me that the whole system at that point becomes a bit shaky. I’d appreciate comments on this one, as I hope others have more expertise and can enlighten me, but I am very worried that BASEL III is built partly on the liquidity and solvency of governments – in some cases pretty sandy foundations.