Europe Set to Postpone Decision on Bank Liquidity Standards

Europe is set to delay its decision on how to implement Basel III bank liquidity rules beyond a June 30 deadline.

“It’s indeed likely,” Chantal Hughes, spokeswoman for Michel Barnier, the European Union’s financial services chief, said today. The European Commission is looking into convening a meeting for its expert group in July to discuss liquidity rules, Steen Poulsen, head of section at the Danish Economy Ministry, said by phone. Talks may take place as late as September, according to Hughes.

Europe is set to back legislation that sidesteps Basel III liquidity standards, according to the Danish government and commission documents obtained by Bloomberg. That means banks in Europe may be free to hold 75 percent more in covered bonds than under Basel III and book the securities at a higher price relative to their market value than the global regulator had envisaged.

The delay from the commission “is because of the size of the legislation,” Christina Holm Eiberg, a spokeswoman for the economy ministry in Copenhagen, said by phone. The ministry expects a decision to be reached in July or in the fall, she said.

After that, the European Council and Parliament will have three months to hold a vote if there’s a motion to reject the commission’s decision.

Biggest Market

Denmark, home to the world’s largest mortgage-backed covered bond market per capita, is confident that the commission’s final agreement will protect the Nordic nation’s interests, Poulsen said.

“There may be some changes before it’s finished, but the main point is that it should follow the main lines of what the commission drafted,” Economy Minister Margrethe Vestager said in an interview last week.

While Basel had assigned all covered bonds a so-called Level 2 status, limiting their use in banks’ liquidity buffers to 40 percent, the EU Commission is set to split the securities into two classes. Banks will be free to use Level 1 covered bonds to fill 70 percent of their liquidity buffers, booked at 93 percent of their market value.

Asset Levels

To qualify as Level 1, bonds will need to be issued in sizes of at least 500 million euros ($678 million), carry high credit ratings and be over-collateralized, the commission document showed.

Banks will also be required to sell a “representative sample” of their Level 1 covered bonds and Level 2 assets on “at least” a yearly basis to demonstrate liquidity and to “minimize the risk of sending a negative signal to the market as a result of the credit institution’s monetizing its assets during periods of stress,” according to the document. Institutions won’t be allowed to hold their own covered bonds in liquidity buffers, it said.

Hughes said any decision on the Level 2 proposal on the Liquidity Coverage Ratio may now take place in September “as technical work is still being finalized.”

Denmark has spent the past 3 1/2 years lobbying the EU Commission to prevent Basel’s proposed treatment of covered bonds being implemented in Europe.

Basel Concerns

Basel says excessive covered bond use can lead to so-called asset encumbrance, as banks set aside less collateral to cover other creditors. The committee has also warned of the risk of interconnectedness that arises when banks hold securities issued by other lenders.

Denmark, which doesn’t hold a seat on the 27-member Basel Committee on Banking Supervision, says the global regulator’s preferential treatment of government bonds in liquidity buffers ignores the experiences of Europe’s crisis. Basel rules allow banks to hold limitless stores of state debt at market value.

Denmark, a AAA-rated nation with a public debt load that’s less than half the average in the European Union, says it doesn’t have enough government bonds to fill banks’ liquidity buffers under Basel rules.

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