Basel III to ease in new bank liquidity rules

LONDON/SEOUL Tue Oct 19, 2010 3:50pm BST

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LONDON/SEOUL (Reuters) - Global banking supervisors agreed on Tuesday to phase in the introduction of a key new global standard on lenders' minimum short-term funding cover, handing further relief to a sector facing a hefty funding gap.

The Basel Committee of banking supervisors and central bankers from 27 countries met on Tuesday in South Korea, which is hosting the Group of 20 leading countries that had called for tougher capital and liquidity requirements in response to the financial crisis.

The committee had already agreed to a soft phase-in for its net stable funding ratio, which covers a bank's longer-term liquidity. That measure will be tested from 2012 and become mandatory in January 2018.

On Tuesday the committee said it would also have a softer phase-in for its liquidity coverage ratio (LCR), which will require a bank to hold enough highly liquid assets, mainly government bonds, to cover 30 days of net cash outflows.

The LCR observation period will start next year but the committee still wants the rule to become a minimum global standard in January 2015.

Introducing an observation period and review clauses gives the committee more leeway to make big changes on the way.

"There are elements of these ratios which we will study during this observation period because these requirements are brand new - that's the reason for this change," the Chairman of the Basel Committee on Banking Supervision Nout Wellink told a news conference in Seoul.

Limiting potential liquidity problems was a major lesson of the financial crisis, Bundesbank President Axel Weber said.

Legal experts said banks will have to stock up on government bonds, in competition with insurers who face their own tougher requirements in Europe under new Solvency II rules.

"It is essential that assets like highly rated corporate or Pfandbrief covered bonds also be eligible," Weber said.

While a phase-in of the LCR had been expected, bankers welcomed confirmation of the observation periods.

Consultancy PWC said the Basel Committee had made a sensible move as it was difficult to forecast what impact the new liquidity rules will have on bank lending.

The Bundesbank's Weber said the burden of adjustment to the new rules would vary across countries and could affect lending in Germany, but that a broad credit crunch is not expected.

The Basel Committee also said it would finalise by year-end its proposal on the use of contingent capital, also known as CoCos, bail-in bonds and other non-equity loss-absorbent instruments to pad out a bank's capital requirements.

Wellink said the Basel members would then decide how to make these banks better equipped to absorb losses by March 2011 and later draw up specific rules.

"We will then come up with concrete proposals for them by mid next-year," he said.

Many Asian banks have been holding on to excess capital due to the uncertainty over the Basel III norms. But maintaining too much capital is set to dilute return on equity of banks.

"The banks will move quickly to put the capital to work. In some cases you would see the dividend payout ratios going from 30 percent to 40 percent. But majority of Asian banks need capital to support the credit growth," one analyst with a foreign brokerage said.

Britain's Financial Services Authority has already proposed its own set of liquidity rules and will be under pressure not to move ahead of the Basel timetable confirmed on Tuesday.

"I look forward to the FSA aligning its introduction of the UK liquidity requirements to those now confirmed by the Basel Committee," said Simon Hills, a director at the British Bankers' Association.

Industry officials also welcomed the review clause which gives supervisors further wiggle room to delay the new rule if capital raising conditions worsen or other problems emerge.

The liquidity rules are part of a wider Basel III package which G20 leaders are set to endorse in Seoul next month.

The Basel Committee said it will publish a detailed text by year-end setting out all the elements of the new capital and liquidity requirements.

Financial industry experts said this timetable signalled that Basel III was unlikely to undergo further big changes.

(Additional reporting by Yoo Choonsik in Seoul and Jonathan Gould in Frankfurt; editing by Catherine Evans and Tomasz Janowski)

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