Banks given four more years to introduce minimum liquidity standards

Bank of England governor Mervyn King says concessions will allow banks to use reserves to help struggling economies grow

Banks have won significant concessions from global regulators after being granted four more years to introduce watered-down measures designed to make them less vulnerable to Northern Rock-style runs and financial shocks.

As well as extending the time limit on compliance, the Basel committee of banking supervisors has relaxed proposals setting out the range of assets banks must hold as a buffer against the threat of a collapse.

The British banking industry described the changes, secured after lobbying, as a "Twelfth Night present". Mervyn King, governor of theBank of England and chair of the committee's oversight body, denied that the agreement was a weakening of earlier proposals: "For the first time in regulatory history, we have a truly global minimum standard for bank liquidity."

The standards are intended to allow a bank to survive a 30-day crisis by retaining a minimum amount of cash and liquid or easy-to-sell assets, as an insurance against the mass withdrawal of deposits and funding freeze that crippled Northern Rock or a systemic crisis of the kind triggered by the Lehman Brothers collapse.

Stefan Ingves, left, chair of the Basel committee on banking supervision's governing body and Mervyn King of the Bank of England

The new rules will not be imposed in January 2015, as intended under an earlier draft, but will be phased in over four years by 2019. King indicated that the concessions would allow banks to use their reserves to help struggling economies grow, rather than have them tied up in meeting the new global banking guidelines, dubbed Basel III.

"Importantly, introducing a phased timetable for the introduction of the liquidity coverage ratio … will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery," he said.

The Basel group includes representatives from the 27 major financial centres – including the UK, Japan, China and the US – and it agreed a first draft of liquidity rules in 2010. The draft triggered fierce lobbying by the banking community because it required the buffers to comprise government bonds and the highest grade of corporate bonds.

Banks warned that it might choke off a global economic recovery by squeezing lending to households and businesses. They added that focusing the buffers on government bonds would force them to buy even more sovereign debt, tying their fortunes more closely to a state's solvency – a concern exacerbated by the mounting eurozone crisis.

King said the new liquidity coverage ratio (LCR) was more "realistic", although he denied that the changes represented a weakening of the proposals.

He added that the agreement would protect taxpayers from the consequences of a banking crisis, saying it was a "clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort".

Under the deal, banks will only have to meet 60% of the LCR obligations by 2015. A study by the Basel committee in 2011 found more than 200 banks had a total shortfall of €1.8tn (£1.4tn) in meeting the 2010 LCR. The way in which the buffer is calculated has also been changed in a way that will benefit many banks, analysts said.

King added: "The committee and the regulatory community more generally felt it was appropriate to broaden the class of liquid assets. That doesn't mean to say it's a loosening of the whole regime."

Simon Hills, executive director of the British Bankers' Association, said allowing mortgage-backed securities in the liquidity buffer would help kick-start that particular market, which has been moribund since the 2007-09 crisis. Mortgage-backed securities have been classed as "liquid" under the new guidelines even though their lack of liquidity from 2007 on was a key factor in the banking crisis, a recurrence that Basel III hopes to prevent.

During times of stress, the Basel committee said, national regulators could allow banks to drop below the minimum liquidity requirement.

The UK Financial Services Authority signalled last summer it would consider relaxing liquidity rules – which required UK banks to hold a buffer of £500bn of government bonds and other instruments – amid concerns that banks were restricting lending to businesses and households.

The financial policy committee, responsible for overseeing financial stability and chaired by King, had considered whether liquidity rules should be relaxed altogether.

UK banks have been concerned about the liquidity rules since they were first suggested in the wake of the 2008 banking crisis and could have required banks to hold up to three times the level of the assets that they held in the past.
Article source : http://www.guardian.co.uk

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