Banks win more flexible liquidity rules from Basel

 

 International banks had been fearing tougher liquidity rules

International financial regulators have eased rules on minimum quantities of cash and liquid assets all banks must hold, set to take effect in 2015.

The agreement, by the body that oversees the Basel Committee on Banking Supervision, is an attempt to make banks less vulnerable to runs.
The new "liquidity coverage ratio" will be phased in from 2015 and take full effect four years later.
Analysts say the rules just announced are more flexible than a draft version.
The new rules are part of efforts to prevent financial shocks such as those prompted by the 2007 run on Northern Rock in the UK, or by the 2008 collapse of Lehman Brothers in the US.
Banks will have to hold enough cash and easily sellable assets, to tide them over during an acute 30-day crisis.
The final version of the rules updates a draft version put forward more than two years ago.

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Analysis Robert Peston Business editor

Perhaps the most striking characteristics of today's agreement - which amends a draft first published in 2010 - is that banks will be allowed to include corporate bonds, some shares and high-quality residential mortgage backed securities in their permitted stocks of liquid assets.
This goes against the grain of central banking and regulatory orthodoxy. In particular, the inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007.
 

 

Analysts had warned that over-stringent standards could reduce lending and stifle economic growth.

The new version allows banks to hold a broader range of eligible assets, including some shares, corporate bonds, and high-quality residential mortgage backed securities.
It also gives them more time to comply with the new standards.
The head of oversight body's head, Mervyn King, said the timeframe ensures the rules "will in no way hinder the ability of the global banking system to finance the recovery".
BBC business editor Robert Peston says the oddity is that most banks currently hold considerably more than the new minimum requirement - because leading central banks have injected massive amounts of liquidity into the financial system through "quantitative easing".
But this simply reflects the depressed times we live in, our correspondents says.
The new rules would force banks to hold vastly more liquid assets than they did in 2007 when big banks barely had enough cash to meet demands for repayment from relatively small numbers of depositors and creditors, our correspondent adds.
They are part of the broader "Basel III" package of reforms, which will require lenders to set aside more capital to absorb losses.
The Basel Committee brings together representatives regulators from 27 nations.

Posted in: World business