BCBS Agrees to Dilute Basel III Bank Liquidity Rules

The Basel Committee on Banking Supervision (BCBS) announced on 6 January that it has agreed to relax its stance on the Basel III accord.

The news will come as a relief to banks – and some corporates worried about an impending lending squeeze – after the US said late last year that it would delay implementation.

The group of global regulators and central bankers said that the so-called liquidity coverage ratio (LCR) applicable to the world’s top 200 banks will still be phased in from 1 January 2015 but will not take full effect until four years later. Banks will still be required to hold a buffer comprising sufficient cash and easily sellable assets to tide them over during an acute 30-day crisis.

However, the agreement will give banks the next two years to build up a buffer of at least 60% of the required size and in subsequent years that will need to increase by at least a further 10 percentage points annually until reaching full size by 2019, when all of Basel III must be in place.

According to Sir Mervyn King, outgoing governor of the Bank of England (BoE) who also heads the BCBS’s oversight body, the revised timeframe ensures the new standards “will in no way hinder the ability of the global banking system to finance the recovery.”

The BCBS also announced that more assets than previously planned would be considered liquid’, such as corporate bonds, some shares and securities held against high-quality residential mortgages. However, at least 85% of the overall figure must be either in cash, top-rated government bonds or other central bank-issued papers.

In additional concessions to the industry, the BCBS changed its assumptions regarding the severity of the financial crises banks realistically might face, and will have to be able to withstand under the new rule. While the original rule required banks to assume that, in a theoretical 30-day crisis, they would see 5% of their retail deposits vanish this figure has now been reduced to 3%. And instead of assuming that corporate clients would draw down their credit lines by 100% in a crisis, the revised percentage is only 30%.

Commenting on the BCBS’s announcement, Nigel Willis, a partner at Deloitte, said: “The implementation of the LCR is an important step towards the creation of a global network for bank liquidity. These initial minimum standards should be further enhanced when negotiations regarding the Net Stable Funding Ration [NSFR] are concluded.

“The combination of a phased implementation timetable for the LCR, broader definition of what constitutes a liquid asset and confirmation that a bank’s stock of liquid assets can be used in times of stress, strikes a welcome balance between the competing demands of raising regulatory standards to increase confidence in the global financial system, and not impeding the recovery of the global economy.”


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