Banks Win Watered Down Liquidity Rule to Deter Loan Squeeze
BOE Governor Mervyn King
60 PercentUnder 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 an e-mailed statement from the GHOS.
Not Easy“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 Inc., said in an e-mail. “Commitments were made by eurozone nations to comply with this agreement, but turning word into deed isn’t going to be easy.”
The deal expands the range of corporate debt that banks can use, allowing some lower rated securities to count. Banks would also be allowed to use some equities and highly rated residential mortgage-backed securities.
Liquid Assets“The committee and the regulatory community more generally felt it was appropriate to broaden the class of liquid assets,” King said. “That doesn’t mean to say it’s a loosening of the whole regime.”
“It became clear during the process of discussing all this that it didn’t make sense really to think about an LCR without having a clear view about what to make of access to central bank facilities,” King said.
Covered BondsCentral banks and regulators left the treatment of covered bonds in the LCR unchanged from 2010. Covered bonds are secured by assets such as mortgages or public-sector loans and are guaranteed by the issuer.
Authorities also agreed to water down parts of the stress scenario that banks will be pitted against to calculate whether they hold enough LCR assets. Still, they expanded the range of risks on derivatives trades that will be taken into account.
Regulatory chiefs said they will give additional guidance on when banks will be allowed to use their LCR buffers.