Global regulators signal leeway on new bank liquidity rules

LONDON Sun Jan 8, 2012 10:14pm GMT

Bank of England Governor Mervyn King arrives to attend a conference in memory of Tommaso Padoa Schioppa, Italy's former finance minister, at the headquarters of the Bank of Italy in Rome December 16, 2011. REUTERS/Giampiero Sposito

Bank of England Governor Mervyn King arrives to attend a conference in memory of Tommaso Padoa Schioppa, Italy's former finance minister, at the headquarters of the Bank of Italy in Rome December 16, 2011.

Credit: Reuters/Giampiero Sposito

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LONDON (Reuters) - Global regulators vowed on Sunday to press ahead with tough new liquidity rules for banks from 2015, but in a move to head off opposition from industry, also said lenders can tap into safety buffers in times of stress.

The Group of Governors and Heads of Supervision (GHOS), chaired by Bank of England Governor Mervyn King, said the "central principle that a bank is expected to have a stable funding structure and a stock of high-quality liquid assets that should be available to meet its liquidity needs in times of stress.

"Once the Liquidity Coverage Ratio has been implemented, its 100 percent threshold will be a minimum requirement in normal times. But during a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement," the GHOS said in a statement following a meeting on Sunday in the Swiss town of Basel.

GHOS, made up of central bankers and top supervisors from nearly 30 countries, oversees the Basel Committee on Banking Supervision, which authored the new Basel III bank capital and liquidity accord that will be phased in from 2013 to make banks able to withstand shocks without taxpayer bailouts in the next crisis.

Many banks already meet the tougher Basel III capital requirements, but the liquidity standards are new and lenders argue that building up such buffers by buying government and corporate bonds in times of market stress is expensive and could force them to crimp lending to the economy.

The Basel Committee has been asked to clarify that liquid assets accumulated in normal times are intended to be used in times of stress and provide additional guidance on the circumstances that would justify the use of the liquidity pool, the GHOS statement said.

But the global regulators and central bankers refused industry calls to push back the introduction of an LCR from 2015.

"Members fully supported the (Basel) Committee's proposed focus, course of action and timeline to finalise key aspects of the LCR by addressing specific concerns regarding the pool of high-quality liquid assets as well as some adjustments to the calibration of net cash outflows," GHOS said.

Most of the liquidity buffer has to be in the form of top- rated government bonds, with the remainder in highly rated corporate debt.

Lenders want greater flexibility, such as the use of securitised debt but GHOS said "the modifications currently under investigation apply only to a few key aspects and will not materially change the framework's underlying approach."

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The aim of the LCR buffer is to ensure banks have enough liquid assets to survive 30 days of outflows at times when it is difficult to find funding on wholesale markets.

Banks like Northern Rock in Britain had to be nationalised during the financial crisis because of liquidity problems.

The GHOS said it has asked the Basel Committee to publish its recommendations by the end of this year.

"The aim of the Liquidity Coverage Ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets such that central banks are asked to perform only as lenders of last resort and not as lenders of first resort," GHOS Chairman King said.

"While the Liquidity Coverage Ratio may represent a significant challenge for some banks, the benefits of a strong liquidity regime outweigh the associated implementation costs," King said.

Britain has already unilaterally decided to push ahead and force its banks to build up liquidity buffers ahead of Basel III.

Hector Sants, chief executive of Britain's Financial Services Authority, has said banks currently can tap into these buffers because of difficulties in the funding market for lenders.

GHOS also backed moves by the Basel Committee to begin reviewing how countries, which include the world's top 20 economies (G20), are implementing the Basel bank accord.

Stefan Ingves, chairman of the Basel Committee and governor of the Swedish Riksbank, said "the Committee's rigorous peer review process is a clear signal that effective implementation of the Basel standards is a top priority."

The review will also look at how countries have implemented so-called Basel 2.5 that was introduced at the end of December to force banks to set aside far more capital to cover risks of complex securitised instruments held on their trading books.

(Reporting by Huw Jones, editing by Maureen Bavdek)

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