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Basel Committee Agrees on Liquidity Rules for Banks

Basel Committee Agrees on Liquidity Rules for Banks
Regulators of the 27-nation Basel Committee reached an agreement on Sept. 12 on new rules that more than double capital requirements for banks over eight years. Photographer: Jason Alden/Bloomberg

Banks will have until 2015 to fully implement rules on how much cash and liquid securities they must hold to gird against a funding shortage in a crisis, the Basel Committee on Banking Supervision said.

The rules are part an overhaul of bank capital requirements the Basel Committee is working on to prevent another financial crisis. Banks rallied in European trading after the committee, the global financial standard setter, also said it would review the rules to make sure they aren’t too onerous.

“The committee is confirming that it’s backing away from implementing a stringent liquidity rule in the foreseeable future,” said Carlos Egea, a banking analyst at Morgan Stanley in London. “If the initial proposals had been adopted, it would have been very difficult for many European banks to sustain the size of their balance sheets and therefore their current business models.”

Basel Chairman Nout Wellink said following a meeting of the regulators in Seoul today, that the committee was taking a “common sense” approach to introducing the ratio. He said that the committee had to be “careful” because it didn’t know the exact effect of the ratio.

The Bloomberg Europe Banks and Financial Services Index rose as much as 2.2 percent, on optimism greater clarity about the rules will allow banks to free up funds, before giving up some of its gains.

Capital Rules

Simon Hills, executive director for prudential capital and risk at the British Bankers’ Association, said that the Basel Committee had “reaffirmed its commitment” to make adjustments to the liquidity ratio. The BBA was “pleased” with the outcome of the meeting, he said in an e-mailed statement.

In a report to Group of 20 countries, the committee also said that “systemically important” banks should be subject to tougher capital obligations than other parts of the banking industry. Wellink said the Basel Committee may publish additional rules for systemically important banks by mid-2011.

The liquidity standard will set out how much cash and readily saleable securities banks must hold to protect themselves from insolvency during a 30-day shock.

“Certain banks are sitting on far too much liquidity,” said Simon Maughan, an analyst at MF Global in London. “They can start putting that to work. Uncertainty about funding requirements is the single-biggest thing constraining loan growth.”


The standard will be phased in starting in 2011 and take effect in 2015, following an observation period, the committee said. Regulators will assess the impact that the liquidity ratio would have on banks’ balance sheets and modify it if necessary.

The regulators didn’t set out a specific liquidity ratio. The committee will present details on this before the end of this year.

The committee said it was working with the Financial Stability Board to develop capital standards for the largest banks that may include “combinations of capital surcharges, contingent capital and bail-in debt.”

Bail-in debt refers to arrangements when bondholders take losses when banks face financial difficulties.

Members of the Basel Committee and the FSB are divided over how to curb risk taking by their biggest banks. France and Germany are resisting a surcharge for big lenders, while the U.K., U.S., and Switzerland advocate the approach. The FSB will discuss the matter at a meeting on Oct. 20 in Seoul.

Banks Treated ‘Differently’

The Association for Financial Markets in Europe, a lobby organization for the banking industry, opposes “designating specific firms as systemically important and treating them differently,” said Rob McIvor, a spokesman for the group.

He said investors would gravitate to banks deemed to be systemically important on the assumption that governments would always save them from insolvency.

“It creates an uneven playing field between banks,” McIvor said.

Regulators of the 27-nation Basel Committee reached an agreement on Sept. 12 on new rules that more than double capital requirements for banks over eight years. G-20 governments last year asked the Basel Committee to overhaul bank capital requirements to prevent a repeat of the financial crisis.

Chris De Noose, managing director of the European Savings Bank Group said the industry remained concerned that the Basel reforms may be harmful to the economic recovery.

“There is a risk that the reforms will prove counter-productive if they weaken those parts of the financial sector which have already proven themselves as a stabilizing force,” he said in an e-mailed statement.

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