Central Bank Chiefs Said to Seek Basel Liquidity Rule Deal

ECB President Mario Draghi
While ECB President Mario Draghi and Bank of England Governor Mervyn King have urged caution on the LCR, supervisors from nations including the U.S., Germany and Sweden have argued that heavily diluting the standard risks rendering it meaningless. Photographer: Ralph Orlowski/Bloomberg

Global central bank chiefs and regulators will next month seek to resolve clashes on a liquidity rule after the Basel Committee on Banking Supervision failed to clinch a full deal on the controversial measure, according to two people familiar with the situation.

The top officials may meet as soon as Jan. 6 in the Swiss city to thrash out a compromise on the so-called liquidity-coverage ratio, that central bankers including European Central Bank President Mario Draghi have warned may choke interbank lending and stifle economic recovery.

Basel members failed to broker an accord on all parts of the LCR during talks last week, said the people, who asked not to be identified because the negotiations are private. Stumbling blocks included the list of assets that banks may use to satisfy the rule and whether the introduction of the standard should be delayed beyond its planned 2015 start date, the people said.

“Positions may be narrowing, but the Basel meeting was so fractious that the LCR remains a chasm from which a final standard has yet to emerge,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail.

“At this point, I think an LCR will emerge from Basel in watered-down, very compromised form if only to keep up hopes of a global bank-regulatory framework,” she said.

The timing of next month’s meeting of the so-called Group of Governors and Heads of Supervision is provisional and may still change. The GHOS is the Basel committee’s governing board.

The Basel committee declined to comment.

Heavily Diluting

While Draghi and Bank of England Governor Mervyn King have urged caution on the LCR, supervisors from nations including the U.S., Germany and Sweden have argued that heavily diluting the standard risks rendering it meaningless.

The LCR would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. It’s a key component of an international package of capital and liquidity measures, known as Basel III, drawn up by officials to avoid a repeat of the 2008 financial crisis.

The rule sets out a stress test that banks should apply to their books, assessing whether they would be able to generate enough cash from asset sales to meet their obligations. A draft version of the standard was published in 2010.

Foreign Branches

“Because the U.S. is committed to a domestic liquidity rule, including one governing foreign branches doing business here, it will push hard for a final accord and it has formidable allies on its side,” Petrou said. “Of course, finalized or not, the key question is whether whatever LCR comes out of Basel then is implemented in anything like a consistent fashion in key markets.”

The U.S. banking industry has a shortfall of around $840 billion in LCR-eligible assets, according to The Clearing House, an association representing lenders including Bank of America Corp., JPMorgan Chase & Co. and Deutsche Bank AG. The findings, dated Dec. 14, use data from the second quarter of 2012.

The Clearing House has called for changes to the LCR, including a revision of the simulated stress scenario, and the scrapping of a cap on the use of covered bonds and corporate debt to meet the rule.

Collective Shortfall

Further work on the LCR will take place in the run up to the planned Jan. 6 meeting, one of the people said.

The GHOS called at the start of this year for the Basel committee “to finalize and subsequently publish” recommendations on the LCR by the end of 2012.

The GHOS brings together monetary policy and bank oversight chiefs from 27 nations including the U.S., U.K., China and Japan.

A sample of 209 banks had a collective shortfall of 1.8 trillion euros ($2.4 trillion) at the end of 2011 in the assets needed to meet the 2010 version of the LCR, according to figures published by the Bank for International Settlements.

There are “critical problems” that need to be addressed in the LCR plans, Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said in an e-mail. “Some central banks will be arguing strongly that they should have more time to evaluate fully the impact of the new liquidity rules and how to deal with them efficiently.”

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