Basel Finds Banks $341 Billion Short of Liquidity Rule

Global banks are 305 billion euros ($341 billion) short of a target for easy-to-sell assets intended to prevent another financial crisis, according to the latest data from the Basel Committee on Banking Supervision.

The Basel rule, known as the liquidity coverage ratio, takes full effect in 2019. Had it been in full force on June 30, 2014, a fifth of the 210 monitored banks would have had a shortfall, the global regulator said in a report on Tuesday.

The world’s central-bank chiefs reached a deal in 2013 on a blueprint for the liquidity rule. It began to phase in on Jan. 1, when banks were required to have at least 60 percent of the liquidity buffers. The minimum requirement rises in equal annual steps to 100 percent in 2019.

“The LCR has been designed to require global banks to have sufficient high-quality liquid assets to withstand a stressed 30-day funding scenario specified by supervisors,” the Basel committee said.

The LCR numerator consists of “unencumbered, high-quality liquid assets that must be available to cover any net outflow,” according to the committee. The denominator comprises “cash outflows less cash inflows (subject to a cap at 75 percent of outflows) that are expected to occur in a severe stress scenario.”

The European Union and the U.S. have taken differing paths in applying the rule.

While the U.S. Federal Reserve has toughened some elements of the measure, EU rules give banks more scope to count covered bonds in their liquidity buffers and permit a wider range of asset-backed debt. The EU has also opted for an October 2015 start date at the 60 percent threshold.

Capital Rules

The Basel sample of banks had an aggregate 155 billion-euro shortfall in the liquid assets needed to meet the 60 percent level at mid-2014, the committee said.

The U.S. Fed has said that it will require banks to fully meet the rule two years ahead of the Basel schedule, while the EU has opted for 2018 with an option to push this back to 2019.

The Basel group, which brings together regulators from about 30 nations to coordinate bank rules, also assessed how well lenders are progressing toward meeting updated capital rules adopted since the 2008 financial crisis, part of an updated rulebook known as Basel III.

The largest global lenders narrowed their aggregate capital shortfall to 3.9 billion euros in mid-2014, compared with 15.1 billion euros at end 2013, according to the Basel group. The figure concerns so-called Group 1 banks, defined as internationally active lenders with over 3 billion euros of capital.

‘Continuous Refinement’

The figures take into account basic Basel requirements as well as capital surcharges set to be imposed on international lenders labeled as too big to fail. Large European banks accounted for 2.8 billion euros of the capital gap, according to data published today by the European Banking Authority.

On capital, the Basel and EBA monitoring reports convey only “some of the picture,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said by e-mail.

“This is in part because several aspects of Basel III are under continuous refinement and adjustment, and also because the Basel requirements are in some cases being seen as minimum standards subject to overlays by individual jurisdictions,” he said. Also “refinement and understanding” of the internal models banks use to measure their capital levels “is a work in progress,” he said.

Before it's here, it's on the Bloomberg Terminal.