A proposal to make U.S. banks hold enough easily-sold assets to survive a 30-day credit drought diverges from a similar international agreement in ways that could hurt the industry, according to bankers’ letters to regulators.
A rule proposed last year by banking regulators would require the biggest banks to hold the assets to make them safer in another global credit crunch. While the proposal was meant to satisfy an accord reached in Basel, Switzerland, the U.S. version had an earlier deadline and narrowed what banks can include among their assets.
“The introduction of any industry-standard liquidity requirement has the potential to cause market distortions,” said groups including the American Bankers Association, Financial Services Roundtable and the Securities Industry and Financial Markets Association, in a Jan. 31 letter to regulators. “A lack of uniform standards across jurisdictions only serves to heighten such issues, as well as negatively affect competitive equity among firms.”
The 27-nation Basel Committee on Banking Supervision amended its agreement for a liquidity coverage ratio on Jan. 12, adding flexibility for how banks can meet its requirements. The U.S. version, set for implementation by 2017, is toughest on banks with more than $250 billion in assets or substantial international reach.
Americans for Financial Reform, a Washington-based coalition of labor, consumer and business groups, urged regulators to stick to a tougher rule. “Liquidity spirals -– or funding runs –- are the most direct cause of bank failure and were the key failure mechanism for both institutions and broader markets in the 2008 crisis,” the group said in letters to the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp.
“The Agencies may have underestimated the incremental liquidity that covered institutions will be required to hold,” Bank of America Corporate Treasurer Gregory R. Hackworth wrote of the original October proposal. “We believe that this will result in many firms increasing the size of their balance sheets to accomodate additional liquid assets.”
Hackworth said the requirement for daily calculations under the draft rule would bring “uncertainties and unnecessary burdens that would increase the operational risk” of its implemention.
Deutsche Bank joined those concerned that inconsistencies between the U.S. and international frameworks would be disruptive.
“The divergence will disrupt both the alignment among global regulatory approaches and the establishment of harmonized global standards, with real consequences for the affected institutions,” said a letter signed by Bill Woodley, deputy chief executive officer of Deutsche Bank North America.
Companies outside banking also weighed in, including U.S. Steel Corp. (X), which argued that the proposal’s treatment of the company’s securitization program for trade accounts will increase its costs and reduce its access to credit.
“Our access to and use of securitization credit facilities is critical in cyclical and capital intensive industries such as the steel industry,” David C. Greiner, an assistant treasurer at the firm, said in a letter.
Also, the exclusion of municipal bonds from the “high-quality liquid assets” banks must hold attracted critics from local governments. The Village of Bald Head Island in North Carolina penned a comment that said its plan to fund a project to combat beach erosion could be jeopardized.
“We fear that your ommission will have the unintended consequence of reducing the marketability of municipal bonds by discouraging banks from purchasing them,” wrote Mayor J. Andy Sayre.
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