Banks Win Approval to Count ESM Debt in Basel Asset Buffers

Banks will be allowed to count their holdings of debt issued by the euro area’s bailout funds toward meeting a liquidity rule set by global regulators.

The Basel Committee on Banking Supervision said that bonds issued by the European Financial Stability Facility and the European Stability Mechanism could be used in buffers of easy-to-sell assets that banks will be required to hold starting next year. The buffer rule, known as a liquidity coverage ratio or LCR, is intended to make banks more resilient to funding squeezes.

Claims on the ESM and EFSF will be “included as Level 1 high quality liquid assets” under the LCR, the Basel group said today in a statement on its website. The Basel committee also confirmed that the ESM and EFSF debt is seen as low risk, meaning supervisors can allow banks to purchase it without them incurring any increase in their capital requirements.

The 500 billion-euro ($695 billion) ESM is a permanent firewall fund, set up to finance crisis loans for indebted nations in the euro area. It has subscribed capital provided by the 18 governments of the currency bloc. The ESM supplanted the EFSF, a temporary agency created in 2010 as the bloc struggled to contain the repercussions of the Greek fiscal crisis.

The Basel committee published a blueprint for the liquidity coverage ratio last year. Under its schedule, the rule will fully apply in 2019 and begins phasing in next year.

Liquidity Buffers

At the start, banks will have to hold buffers equivalent to 60 percent of what they need when the rule is in full effect.

Under last year’s blueprint, banks can count cash and a variety of securities including governments bonds and bonds issued by multilateral development banks, toward their liquid asset buffers.

Today’s announcement clarifies that ESM and EFSF debt has so-called level 1 status in the LCR, meaning banks can count it toward meeting the liquidity rule without any caps or limits.

That status derives from the group’s decision to allow supervisors to apply a zero risk weight to the debt as part of its capital rules, the Basel committee said.

The Basel committee brings together bank regulators from 27 nations including the U.S., U.K., Brazil and China to co-ordinate rule making. One of its tasks is to set minimum capital rules for banks, as a way of ensuring that lenders are sufficiently robust to withstand crises.