EU Banks May Need to Hit Basel Liquidity Targets Early

Banks in the European Union may need to comply with an international liquidity rule before competitors in other parts of the globe as part of a deal on how the bloc should implement Basel banking standards.

Nations are weighing calls from the European Parliament for an “accelerated” introduction of the so-called liquidity coverage ratio, according to a document obtained by Bloomberg News.

Ireland, which holds the rotating presidency of the EU, is pressing for an agreement to have the rule take full effect on Jan. 1, 2018, a year ahead of a deadline set last month by global central bank chiefs, according to the document, which was drawn up by the Irish government and is dated Feb. 8.

The LCR -- which would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze -- is part of an overhaul of global financial rules, known as Basel III, intended to prevent a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.

The EU has struggled to agree on legislation to apply Basel III, as governments and the EU Parliament clashed on a range of issues including curbing banker bonuses, capital rules for systemically important banks, and the liquidity requirements.

The international 2019 start date for the liquidity ratio was part of a package of proposed rules decided by central bank chiefs last month meant to water down the standard amid concerns that it could harm interbank lending and stifle a nascent economic recovery. Global regulators had previously planned to implement the requirement fully from 2015.

Acceleration Negative

Deutsche Bank AG, Europe’s biggest bank by assets, fell as much as 1.4 percent in Frankfurt trading after the report on the LCR implementation before recovering. The Bloomberg Europe 500 Banks Index was down 0.65 percent to 96.19 today.

“Acceleration of the timetable would be a negative” for European banks, said Simon Willis, a London-based banking analyst at Daniel Stewart Securities Plc. “At the start of the year there was talk about the timetable for liquidity rules being postponed, which pushed bank stocks a lot higher. Anything to the contrary would be seen negatively.”

Basel regulators said last month that phasing in the LCR from 2015 to 2019 would ensure that it could be introduced without disrupting an orderly strengthening of the banking system or the financing of the economy.

Front Running

Now, lawmakers “want an accelerated introduction of the 100 percent ratio,” according to the Feb. 8 document.

“I think front-running the LCR in Europe is entirely possible,” said Simon Gleeson, financial regulation lawyer at Clifford Chance LLP in London. “The question is whether they’ll write it into the directive itself or do it via the back door, through the European Banking Authority.”

Ireland will hold its next negotiation meeting on the proposed law with legislators on Feb. 19, a spokeswoman for the presidency said in an e-mail. Othmar Karas, the lawmaker guiding the European Parliament’s work on the legislation, said today at a conference in Vienna that Ireland and legislators had drafted agreements on all aspects of the Basel rules.

National officials will discuss the draft law at a meeting later this week, said the spokeswoman, who couldn’t be named in line with official policy.

Under the Irish plan, banks’ LCR requirements would phase in from 2015 to 2018, starting with a requirement that they hold 60 percent of the necessary buffer of liquid assets at the earliest date.

Global Accord

Deferring the LCR was “a hard-fought concession granted to entice the EU” to accept the rule “in spite of key states that wanted simply to walk away from a global liquidity accord,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail. Countries that insisted on the delay “are unlikely now to agree to suggestions from Basel hawks that they go back to the LCR timetable to which they objected so vociferously just a month or so ago.”

An agreement between governments and EU lawmakers on the overarching Basel III package is “close,” according to the document. Still, “there are a number of outstanding issues where there remains a clear divergence of views.”

The ongoing talks on the law meant that the EU missed a January 2013 deadline to begin legally phasing in some Basel III capital rules. The U.S. also missed the deadline.

A majority of EU nations back a Jan. 1, 2014, date to begin the phasing in, while some others would prefer a longer timetable, according to the document.

Ireland is proposing that the beginning of 2014 should be fixed as the start date, on condition that the legislation can be agreed upon and published at least six months beforehand.

Other open issues in the Basel law talks include how much freedom governments should have to impose additional capital rules on their banks, and how these measures would interact with a system of capital surcharges for systemic lenders that is sought by the parliament, according to the document.

(Updates with analyst in eighth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE