Burgess COMMENTARY

Peter Burgess

Banks win more flexible Basel rules

International banks received a new year fillip when regulators announced that the first ever global liquidity standards would be less onerous than expected and not be fully enforced until 2019, four years later than expected.

Aimed at preventing a repeat of the 2008 bank collapses, the “liquidity coverage ratio” (LCR) announced on Sunday marks the first time that global regulators have sought to require individual banks to hold enough cash and easy-to-sell assets to allow them to survive a short-term market crisis. The measure is the second critical plank of the Basel III reform package. Tougher new capital rules began to be phased in this month.

But the final rule approved by the supervisors of the Basel Committee on Banking Supervision is significantly more flexible than the draft version put forward more than two years ago. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

The calculation methods have also been changed in ways that will significantly reduce the total size of the liquidity buffers many institutions have to hold against outflows from possible depositor runs and corporate and interbank credit lines.

“This is quite a lot more favourable to the industry than I and the market were expecting. The changes to the asset definitions and the outflow calculations in particular look like a fairly massive softening of approach,” said Daniel Davies, banking analyst for Exane BNP.

Sir Mervyn King, who heads the Basel committee’s oversight group, called the agreement “a very significant achievement [and] a clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort”.

When the Basel group, which includes representatives from 27 major financial centres, first agreed in 2010 to put in place liquidity rules, the draft said that only government bonds and top-quality corporate bonds would count toward the buffers.

But the industry lobbied hard to get the rules watered down, arguing that the draft version would tie banks too closely to sovereign debt and constrain their ability to lend to the wider economy.

Regulators ultimately agreed to count some equities, corporate bonds rated as low as BBB- and top-quality mortgage-backed securities toward up to 15 per cent of the requirements, albeit at a discount.

Stefan Ingves, the Swedish central banker who chairs the Basel Committee itself, said the changes would effectively increase the average LCR for the world’s 200 largest banks from 105 to 125 per cent. But he noted that liquidity stocks are not evenly spread, and some institutions remain well below the required levels. That is why the banks will only have to meet 60 per cent of the requirement in 2015, and fully by 2019.

The results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers. In addition, the Basel group made clear that national regulators would be able to relax the rules in a crisis so institutions will not be expected to hold “buffers on top of buffers”.

The Basel committee remains committed to producing a third prong of Basel III, known as the net stable funding ratio that will limit banks’ reliance on unstable short-term funding. The group aims to produce that rule in the next two years and put it into effect in 2019, Sir Mervyn said.