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Impact of Basel Bank Liquidity Rule Must Be Weighed, EU Says

The European Commission said that while it remains committed to adopting a “detailed” bank liquidity ratio in 2015, possible negative effects need to be studied.

“Clearly we need to pay attention to a possible negative impact on lending to the real economy and on the interbank market,” commission spokesman Stefaan De Rynck said in an e-mail. “Important discussions are going on at the level of the Basel Committee which will finalize its details on this in 2013.” The U.S. and Japan have delayed their implementation of the ratio “because of this.”

The measure, known as a liquidity coverage ratio, or LCR, would oblige banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement was included by global regulators in an overhaul of bank rules that was agreed on by the Group of 20 nations following the collapse of Lehman Brothers Holdings Inc.

The commission has proposed delaying and weakening banks’ reporting of their compliance with the draft Basel liquidity rules, Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview.

Compromise Proposal

Bowles said she would resist the compromise proposal that was made by the commission to spur negotiations on how to apply Basel rules in the 27-nation EU, because they would signal a watering down of the measures.

The compromise proposal on the LCR is “very much weakened” compared with the regulator’s original plan, Bowles said. This stems from fears that forcing banks to disclose their liquid assets “will disturb markets,” she said.

Calls to water down the ratio may also be linked to the risk that banks will be shown to be overly reliant on central-bank lending, Bowles said. Concerns expressed by the European Central Bank about the LCR might signal a “conflict of interest,” she said.

The Basel Committee on Banking Supervision’s proposals would require banks to disclose how well they measure up to the LCR even before it becomes mandatory in 2015.

The commission compromise, obtained by Bloomberg News, would postpone EU decisions on what assets banks would be able to use to meet the LCR as well as agreements on other parts of the standard. These include the toughness of the stress scenario that banks would be measured against.

EU lawmakers and governments must agree on the final wording of the rules before they can take effect in the bloc.

Balancing Act

Andrea Enria, the chairman of the European Banking Authority, told members of the parliament in Brussels today that the EU needed to strike a “delicate balancing act” of having a strong liquidity rule that won’t “kill the interbank market, the money market, which is already close to being dead.”

Enria rejected calls from banks to be allowed to include equities and residential mortgage backed securities in their LCR buffers.

The Basel committee, which brings together regulators from 27 nations including the U.S., U.K. and China, is aiming to complete a review of the LCR by the end of this year. The ratio is part of an overhaul of bank capital and liquidity rules known as Basel III.

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