EU May Back Delay on Bank-Liquidity Rule Detail in Basel Law

The European Commission is urging legislators to postpone their demands for detailed rules on bank liquidity amid concerns they might increase market pressure on lenders and cut interbank lending.

The commission has made the proposal to help broker a deal on the European Union’s implementation of global bank rules before a January deadline. European Parliament members have so far insisted on inserting precise liquidity rules in the law to apply the standards -- a prospect that has raised concerns among governments and central banks.

A less detailed approach in the draft law would have “major advantages,” according to the note drawn up by commission officials for lawmakers working on the dossier, and obtained by Bloomberg News. It’s “less risky, less susceptible to harmful pressure from the markets and rating agencies.”

The EU has struggled to agree on how to implement the revised global rulebook for banks, which was drawn up by regulators in the Basel Committee on Banking Supervision.

In addition to the liquidity rule, EU officials are also working on compromise plans for curbs on banker bonuses and on requirements for banks deemed too big to fail, as parliament lawmakers and governments seek to strike a deal on the plans.

Michel Barnier, the EU’s financial services chief, said yesterday that an accord is possible by the end of this month.

Funding Squeeze

The liquidity standard, called a liquidity coverage ratio, or LCR, is scheduled to apply from 2015, and would require banks to hold enough easy-to-sell assets to survive a 30-day funding squeeze. Lenders would be expected to report on how well they measure up to the rule before it becomes mandatory.

Leaving out details on the LCR at this stage will allow the EU to take into account any changes to the standard at international level, according to the commission document, which points out that the Basel committee is reviewing the measure.

This approach may also prevent the draft standard from harming banks’ lending to businesses and each other, according to the document.

The commission note has been circulated to governments and lawmakers ahead of an EU negotiation meeting on the rules tomorrow in Brussels -- the latest in a series of attempts to broker a compromise on the draft law.

Up-Front Detail

A lack of up-front detail on the LCR won’t prevent regulators from being able to properly assess the health of their banks, according to the document.

The European Banking Authority will be able to set detailed reporting requirements for lenders, who would be expected to provide data on their liquidity on a monthly basis, the commission said in the compromise plan.

Details of another ratio, scheduled to take effect in 2018, should also be stripped out of the draft law, according to the document. That measure would force banks to seek stable sources of funding.

Stefaan De Rynck, a spokesman for EU Financial Services Commissioner Michel Barnier, declined to immediately comment on the document.

Philippe Lamberts, the lawmaker leading the work on the measures for the parliament’s Green group, said he was sent the commission note this week. He declined to comment on its content.

Banks have cautioned that the Basel liquidity measure may force them to scale back loans to businesses if left unchanged. European Central Bank President Mario Draghi has also criticized the proposed standard, saying it discourages banks from lending to each other.

The Basel committee, which brings together regulators from 27 nations including the U.S., U.K. and China, is aiming to complete a review of the LCR by the end of this year.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.