Banks win 4-year liquidity delay

Bloomberg

Mervyn King, the Bank of England governor, says the delay in the global liquidity rules was a compromise between competing views. Photo: Bloomberg.

Global central bank chiefs gave lenders four more years to meet international liquidity requirements and watered down the measures in a bid to stave off another credit crunch.

Banks won the delay to fully meet the so-called liquidity coverage ratio (LCR) following a deal struck by regulatory chiefs who met on Sunday in Basel, Switzerland. They will be able to pick from a longer list of approved assets, including equities and securitised mortgage debt, as they seek to build up buffers of liquidity for use in a financial crisis.

“This was a compromise between competing views from around the world,” Bank of England governor Mervyn King said at a briefing following the meeting. King chairs the Group of Governors and Heads of Supervision (GHOS), which decides on global bank rules. “For the first time in regulatory history we have a truly global minimum standard for bank liquidity.”

Banks and top officials such as European Central Bank president Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households.

“The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”

The Bloomberg Europe Banks and Financial Services index rose as much as 2.1 percent in morning trade. Deutsche Bank added as much as 5 percent and both BNP Paribas and Barclays were up 4 percent at 11am in London.

“The loosening of liquidity rules has been long-signalled, and thus we wouldn’t expect a huge rally, but we have been badly wrong-footed in the past,” Sandy Chen, a bank analyst at Cenkos Securities in London, wrote in a note.

The decision to relax liquidity rules for banks may boost pretax profit at Barclays by about 4 percent, according to Andrew Lim, an analyst at Banco Espirito Santo.

UK banks such as Barclays, which had built up large reserves of high-quality liquid assets, would be among the biggest beneficiaries of global regulators’ decision to implement a watered-down version of the mandatory coverage ratio, Lim said.

Regulators at the Basel Committee on Banking Supervision struggled throughout last year to revise the LCR. After failing to reach a final deal last month, it was left to central bank and regulatory chiefs on the GHOS to make a final decision.

The LCR would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. It is a key component of a package of capital and liquidity measures, known as Basel 3, drawn up to avoid a repeat of the 2008 financial crisis. Basel 3 has been subject to mounting criticism for its complexity, amid delays to its implementation in the EU and US.

The liquidity rule sets out a stress test that banks should apply to their books, assessing whether they would be able to generate enough cash from asset sales to meet their regulatory obligations. A draft version of the measure was published by regulators in 2010, on the basis that it would take effect on January 1, 2015.

Under yesterday’s deal, banks would only have to meet 60 percent of the LCR obligations by 2015, and the full rule would be phased in annually through 2019, according to a statement from the GHOS.

A sample of 209 banks assessed by the Basel committee had a collective shortfall of E1.8 trillion (R20.1 trillion) at the end of 2011 in the assets needed to meet the 2010 version of the LCR, according to Basel group figures.

Banks had warned that the initial LCR proposal would force them to buy additional sovereign debt, more closely tying their fate to governments’ solvency. The 2010 rule was drafted before the EU was fully confronted by the ongoing sovereign debt crisis.

“GHOS has rescued the concept of a global liquidity rule, but its reality remains up in the air,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics, said. “Commitments were made by euro zone nations to comply with this agreement, but turning word into deed isn’t going to be easy.”

The latest LCR rule retains the principle that allows banks to use sovereign debt to meet their LCR obligations, if the bonds are considered essentially risk free under international bank capital rules. – Jim Brunsden, Giles Broom and Ben Moshinsky (Brussels and Geneva) from Bloomberg