Basel Said to Agree on Draft Changes to Bank Liquidity Rule

Bank of England Governor Mervyn King
Bank of England Governor Mervyn King said this month that “much work still needs to be done” to ensure that the LCR is “properly integrated with the regime of liquidity provision by central banks. Photographer: Simon Dawson/Bloomberg

Global banking regulators have tentatively agreed to change the way they calculate whether banks are holding enough liquid assets following concerns the planned rules were too severe, according to two people with knowledge of the matter.

The Basel Committee on Banking Supervision discussed the standard, known as a liquidity coverage ratio, or LCR, at a meeting last week in Stockholm, according to the people, who asked not to be identified because the talks are private. Regulators changed assumptions about what may happen to banks in another credit crisis, the people said. A U.K. regulator separately today said its banks may have more room to dip into liquidity buffers because of Bank of England funding.

The Basel group hasn’t managed to reach a deal on the more contentious issue of what assets banks’ should be allowed to count toward meeting the LCR, the people said. The group is split over how tough the standard should be, one of the people said, while declining to provide details.

Central banks have sought to bolster banks’ funding since the 2008 financial crisis on concern that a loss of confidence in lenders could lead to a liquidity crunch and imperil the global economy. The European Central Bank has injected more than 1 trillion euros ($1.2 trillion) of three-year loans into the banking system since December.

Liquid Assets

Global regulators have drafted rules to force banks to hoard liquid assets and ensure access to stable funding. A first draft of the rules was published by the Basel committee in December 2010.

The LCR rule, scheduled to take effect in 2015, would force lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

Banks have argued that the measure may curtail loans by forcing them to keep too much cash and buy government bonds. Global regulators said last year that they would amend the rule to address any unintended consequences.

The press office for the Basel Committee in Basel, Switzerland, declined to immediately comment. The group brings together banking supervisors from 27 nations, including the U.S., U.K. and China.

The U.K. Financial Services Authority said today that it will include Bank of England liquidity measures in calculations of banks’ liquid asset buffers, giving banks room to dip to into reserves.

The FSA said lowering the requirement for liquid assets means banks should have more funds to lend to businesses and consumers.

Emergency Funds

U.K. lenders have built up liquidity buffers worth around 500 billion pounds ($784 billion) since the 2008 financial crisis, Andy Haldane, the U.K. central bank’s director for financial stability, said. They’ve also lodged enough collateral with the Bank of England to generate an extra 150 billion pounds in emergency funds.

“Banks are holding buffers on top of buffers,” FSA Chairman Adair Turner told journalists in London. “They’re holding more than we require from them.”

The Basel committee said earlier this year that banks should draw on their pools of LCR assets during stressed times. The group is working on criteria to define when the liquidity buffers can be tapped, the people said.

Separately, the Basel group today issued draft plans for tougher capital requirements and supervision of large national banks, in an attempt to slash the risk that such lenders could collapse and roil financial markets. Many large national lenders escaped

Domestically Systemic

“The failure of such a bank could have an important impact on its domestic financial system and economy,” the group said in a statement. These so called domestically systemic, or D-SIB, lenders should face additional capital requirements “commensurate” with their systemic importance, it said.

The paper leaves it to national regulators to decide what the maximum level of capital surcharges should be. The group will seek views on the measures until Aug. 1, with the plans set to enter into force in 2016.

On the liquidity coverage ratio, regulators at last week’s Basel meeting agreed on provisional changes to the model used in the measure to simulate a credit squeeze. The changes involve a reduction in the rate that companies would be expected to withdraw some kinds of deposits, and the extent to which a lender’s clients would draw down liquidity lines. The draft changes will be reviewed by the committee and its board of supervisors, the people said.

The committee plans to develop a final LCR standard by the end of 2012, and discussions will continue at the group’s next meeting in September.