Spanish, Irish Bailout Bonds May Be Protected in EU Basel Law

Spanish and Irish bailouts won’t penalize the two countries’ lenders as they strive to meet new liquidity requirements, according to draft European Union proposals.

Bonds issued by government-backed bad banks and rescue funds should be given a protected status under the liquidity rule, according to the EU plan, obtained by Bloomberg News. The securities would automatically count toward lenders’ efforts to meet the standard, which will require banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

The European Banking Authority, the London-based agency that sets standards for bank regulation across the 27-nation EU, would be tasked with designing how to protect the status of the government-backed bonds, according to the document, which was prepared by Cyprus’s EU Presidency and dated Oct. 22.

EU nations are in negotiations with the European Parliament over how the bloc will implement the Basel III global banking accords, ahead of an international end-of-the-year deadline. The draft law sets minimum capital requirements and asks the EBA to design how the new liquidity ratio will apply to banks across the EU.

Concerns that mounting losses on real estate held by banks could burden government finances helped push Spain into seeking a European bailout of as much as 100 billion euros ($130 billion) to shore up its financial system in June. Ireland received an international bailout in 2010.

The draft EU law specifically cites the need to protect bonds on banks’ balance sheets that were issued by Ireland’s National Asset Management Agency, or NAMA, and by the Spanish Asset Management Company, also known as the FROB.

Scale Back

Banks have cautioned that the liquidity measure may force them to scale back loans to businesses if left unchanged. European Central Bank President Mario Draghi has also criticized the proposed standard, saying it would discourage banks from lending to each other.

The liquidity coverage ratio is scheduled to take effect in 2015, and is under review by the Basel Committee on Banking Supervision.

The EU’s implementation of the LCR should be “comparable” to what is agreed on in the Basel committee, according to the document.

Still, the EBA should weigh “possible unintended consequences” of the measure on central banks’ ability to apply their monetary policies, according to the document.

EBA should also assess whether the standard might lead lenders to offer lower-quality assets as collateral to central banks, and whether the standard might harm interbank lending.

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