Banks
Win Watered Down Liquidity Rule to Deter Loan Squeeze
By Jim Brunsden & Giles Broom - Jan 7,
2013 1:27 AM ET
Global
central bank chiefs agreed to water down and delay a planned bank liquidity
rule to counter warnings that the proposal would strangle lending and stifle
the economic recovery.
Lenders
will be allowed to use an expanded range of assets including some equities and
securitized mortgage debt to meet the so-called liquidity coverage ratio, or
LCR, following a deal struck by regulatory chiefs meeting yesterday in Basel, Switzerland.
Banks will also have an extra four years to fully comply with the measure.
BOE
Governor Mervyn King
Chris
Ratcliffe/Bloomberg
“This
was a compromise between competing views from around the world,” Bank of England
Governor Mervyn
King said at a briefing following yesterday’s meeting. King chairs the
Group of Governors and Heads of Supervision, or 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.”
Basel
Committee
Asian
financial stocks fell. The MSCI
Asia Pacific Financials Index (MXAP0FN) declined 0.2 percent at 3:22 p.m.
in Tokyo from a
more than four-year high. The benchmark MSCI
Asia Pacific Index (MXAP) slid 0.3 percent.
Regulators
at the Basel Committee on Banking Supervision struggled throughout
2012 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’s a key component of a package of capital
and liquidity measures, known as Basel III, drawn up to avoid a repeat of the
2008 financial crisis.
Basel III has been
subject to mounting criticism for its complexity, amid delays to its
implementation in the European Union and U.S.
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 Jan. 1, 2015.
60
Percent
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 an
e-mailed statement from the GHOS.
A
sample of 209 banks assessed by the Basel committee had a collective shortfall
of 1.8 trillion euros ($2.3 trillion) at the end of 2011 in the assets needed
to meet the 2010 version of the LCR, according to figures published
by the Basel group.
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 a sovereign debt
crisis that challenged traditional assumptions about the creditworthiness of government
bonds.
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
latest LCR Rule retains the principal that allows banks to use sovereign debt
to meet all of their LCR obligations, if the bonds are considered essentially
risk free under international bank capital rules. The EU and U.S. have been criticized by international regulators for misapplying parts
of the capital rules, allowing lenders to count more of the sovereign debt they
hold as risk free.
Under the 2010 plan,
banks would have been allowed to use cash and government bonds to meet the LCR,
subject to some rules on the quality of the sovereign debt. Lenders could also
have used highly-rated corporate debt or covered bonds to meet 40 percent of
their LCR requirements. 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.”
The
additional securities will get bigger writedowns to their value than those that would have been
eligible under the 2010 LCR. They also won’t be allowed to count for more than
15 percent of a bank’s LCR buffer.
Supervisors will have
discretion to decide whether the reserves lenders keep with central banks will
count toward the LCR. Regulators will also continue to assess how the LCR will
interact with liquidity support measures provided by national central banks,
the GHOS said. “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
Bonds
Central 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.
The
GHOS brings together top officials from central banks and regulators in 27
nations including the U.S., U.K., China and Japan. It is the governing body of the Basel committee.
The Basel committee
will also press ahead with reviewing another draft liquidity rule included in
Basel III. This measure, known as a net-stable funding ratio, requires banks to
back long-term lending with funding that won’t dry up in a crisis.
To
contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;
Giles Broom in Geneva at gbroom@bloomberg.net
To
contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net