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 Sunday in Basel, Switzerland. Banks will also have an extra four years to fully comply with the measure.
“This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said at a briefing following Sunday’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.
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 global regulators in 2010, on the basis that it would be applied from Jan. 1, 2015.
Under Sunday’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.
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 credit worthiness of government bonds.
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.
Sunday’s 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 mortgage backed securities.
These additional securities, including less-highly rated corporate debt, will be given larger 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.
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.
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