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Basel Group May Reach Deal on Changes to Bank Liquidity Rule

The headquarters of Deutsche Bank AG in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Global banking regulators will seek an accord later this month on changes to draft liquidity rules criticized by some governments and lenders as a threat to economic recovery.

The measures will be considered at a meeting of the Basel Committee on Banking Supervision on March 20 and 21, Rene van Wyk, who represents South Africa’s central bank on the committee, said in an interview.

The Basel group will “present some calibration points and technical calculations” without changing the “fundamentals” of the standard, he said. The group will also work on options for toughening oversight of lenders whose failure could roil domestic markets, he said.

The so-called liquidity coverage ratio is part of an overhaul of bank regulation, known as Basel III, that was agreed on by the committee to avoid a repeat of the events that led to the 2008 collapse of Lehman Brothers Holdings Inc. It would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

The LCR plans have been attacked by some governments and banks as overly restrictive as few assets other than sovereign debt would be recognized as highly liquid.

The Association for Financial Markets in Europe, which represents international banks including Deutsche Bank AG, BNP Paribas SA and UBS AG, has said that the measure may make it harder for lenders to spread their risks, so making them more vulnerable in a crisis, while also forcing them to curb some lending.

Privileged Treatment

The “privileged treatment” of sovereign debt in the LCR has “less and less justification,” said Markus Heidinger, a partner dealing with financial regulation at law firm Wolf Theiss in Vienna. “It increases the interdependency between states and banks, and leaves private and commercial borrowers out in the rain,” he said in an e-mail.

The LCR is scheduled to become binding on banks by the start of 2015.

The Basel committee is caught between the fact that “pushing banks to have all their liquidity in government bonds does not make sense in light of the sovereign debt crisis, and the fear of destabilizing a fragile market for sovereigns,” said Jesper Berg, senior vice president at Nykredit A/S, Denmark’s biggest mortgage bank.

South African Shortfall

South African lenders “seem to be short about 260 billion rand ($34.3 billion),” in the liquid assets they would need to meet the LCR, said Van Wyk, South Africa’s registrar of banks. The figure is based on the assumption that five significant banks would simultaneously have a ‘run’ by their depositors, he said.

The run would be part of the hypothetical scenario used by regulators to judge whether lenders are holding enough liquid assets to cope with a stressed situation.

Denmark has said that the LCR, in the form proposed by the Basel committee, would cause severe damage to its mortgage market.

The Basel committee said in January that lenders should be allowed to run down their stocks of liquid assets in crises. The group said it is preparing detailed proposals on when lenders should be allowed to take such action.

‘Wishful Thinking’

“There have been expectations in continental Europe that the Basel Committee would water down its stance on liquidity but this was mostly wishful thinking,” said Nicolas Veron, a senior fellow at Bruegel, a Brussels-based economics research group.

“European banks need to realize that meaningful liquidity standards are desired by a broad majority of G-20 countries and Basel Committee members, even though Europe itself appears to be more divided on the issue,” Veron said.

The Basel committee brings together bank regulators from 27 nations including the U.S., U.K. and China to set prudential rules for lenders.

Van Wyk said regulators at this month’s meeting will also discuss another proposed liquidity rule, known as a net stable-funding ratio, that would force banks to finance part of their long-term lending from sources that are unlikely to dry up in a crisis. The ratio is scheduled to become binding on banks at the start of 2018.

Stable Funding

It is “probably unlikely” that all South Africa’s banks can find the stable funding they would need to fully meet the NSFR standard, he said. “We’re not alone,” he said. “We have a task team looking at it and seeing if we can close the gap.”

Regulators at the Basel meeting will discuss possible tougher rules for lenders whose collapse would harm their national economies, Van Wyk said.

The measures would mark an extension of an agreement last year by the Group of 20 countries to impose capital surcharges and tougher oversight on lenders, known as G-SIFIs, whose failure would threaten global stability.

“Some work has been done and it will follow the same sort of rules as the G-SIFIs,” Van Wyk said. The Basel committee is scheduled to publish a progress report on the new rules by next month.

Regulators next month will also begin joint probes into how well Basel III is being implemented in U.S., EU and Japan, Van Wyk said. These so-called peer reviews will be completed by June. Basel accords need to be enshrined in national laws before they can be applied.

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