EU Banks Set to Win Nine-Month Basel Liquidity Reprieve

European Union banks are set to win a nine-month delay before they have to begin complying with an international liquidity rule intended to ensure they can survive when money markets seize up.

The EU plans an Oct. 1, 2015, start date for implementing global rules set by the Basel Committee on Banking Supervision for banks to hold a minimum amount of assets that would be easy to sell in a crisis, according to a European Commission document obtained by Bloomberg News. That’s nine months after the date set by Basel. The rule will be phased in over several years.

“The technical complexity of the issues, the need for stakeholder consultation and to continue discussions with national experts until June 2014 have prevented earlier finalization” of how the EU will apply the so-called liquidity-coverage ratio, according to the document.

Europe’s banks at mid-2013 had a collective shortfall of 262 billion euros ($353 billion) in the liquidity buffers needed to fully meet the rule, according to data from the European Banking Authority.

The liquidity coverage ratio, or LCR, pits banks against a 30-day stress scenario and requires them to have enough cash and liquid assets such as sovereign debt and covered bonds so they could come through a funding crunch unscathed.

The measure was drawn up by the Basel committee, a group of regulators from 27 nations including the U.S., France, the U.K. and China. Basel planned a phase-in period through 2019, while the EU has vowed full implementation one year earlier.

Post-Crisis Overhaul

In the first year, banks would be required to have 60 percent of the full liquidity buffer.

An EBA survey of 174 banks, published in March, found that two-thirds of banks already met the full requirement in mid-2013, while 14 percent were below the basic 60 percent rule.

While the EU agreed last year to include the liquidity standard in a post-crisis overhaul of its banking rule book, it handed the commission, the EU’s executive arm, and regulators the task of preparing detailed standards to apply it.

In addition to the delay, the EU is also planning to relax parts of the Basel rule, according to the document. The plans include giving banks more scope to use covered bonds to fill their required liquidity buffers and expanding the range of asset-backed debt that lenders can use to meet the LCR.

Covered Bonds

The commission has also scrapped its own earlier plan to require issuers of covered bonds to have high credit ratings for the securities to receive the highest liquidity status under the LCR, according to the document. Instead, issuers would have to meet minimum requirements on the information they disclose to banks buying the bonds.

The rating threshold proposed in earlier documents met with opposition from banks in countries including Denmark, which has pushed to dilute Basel limits on covered bonds, securities backed by a dedicated pool of assets such as mortgage debt.

The EU approach contrasts with plans from the U.S. Federal Reserve for applying the LCR.

The Fed said last year that U.S. banks would be required to meet a standard that was “more stringent” than Basel, and that the rule would phase in over a two-year period starting on Jan. 1, 2015.

The commission will present its LCR proposals by “late September,” according to the document. They will then be reviewed by governments and the European Parliament before becoming binding.

A spokeswoman for the commission declined to comment immediately on the document.

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

To contact the editors responsible for this story: Patrick Henry at phenry8@bloomberg.net Tasneem Hanfi Brogger

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