After nearly a year of negotiating, and with hardly any reprieve in sight, global central bank chiefs agreed on 6 January 2013 to "water down" and delay a crucial bank liquidity rule.
This was in reaction to the banks' concerns that the earlier proposal would strangle lending and stifle any hope of economic recovery. Under the new agreement lenders will be allowed to use an expanded range of assets including some equities and securitized mortgage debt to meet the so-called liquidity coverage ratio, or LCR.
Most banks that we spoke with in Asia, Europe and the US, have severely criticized Basel III for its complexity, stringent (even unrealistic) Capital Adequacy measures, and its convoluted implementation process. This new liquidity standard carries hope of stimulating lending, freeing up more capital and driving down cost of capital, globally.
With this new global measure agreed upon, banks would only have to meet 60% of the LCR obligations by 2015, and the full rule would be slowly phased in - with the right stress test in place - up until 2019.
The deal was struck by regulatory chiefs meeting yesterday in Basel, Switzerland. Banks will have until 2018 to fully comply with this new measure.
Global standard for bank liquidity
This is the first time in regulatory history that the Group of Governors and Heads of Supervision (GHOS), the governing body of the Basel committee, have a truly global minimum standard for bank liquidity.
Since the introduction of the new standards in 2011 and 2012, global banks, specially the Tier 1 lenders, have been pushing for changes to the LCR, arguing that it would choke inter-bank lending, dramatically cut back lending to businesses and make it harder for authorities to implement monetary policies.
The LCR was expected to "force" banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. This was one of the main Pillars of Capital & Liquidity management measures, known as Basel III, created to avoid a repeat of the 2008 financial crisis.
Under the 2010 plan, banks would have been allowed to use cash and government bonds to meet the LCR, subject to some rules on the quality of the sovereign debt. Lenders could also have used highly rated corporate debt or covered bonds to meet 40% of their LCR requirements.
The latest LCR rule retains the principal that allows banks to use sovereign debt to meet all of their LCR obligations, if the bonds are considered essentially risk free under international bank capital rules. The deal however expands the range of corporate debt that banks can use, allowing some lower-rated securities to count. Banks would also be allowed to use some equities and highly rated residential mortgage-backed securities.
The BASEL committee is also mulling over a newer, more secured liquidity draft rule for Basel III. This measure, known as the Net Stable Funding Ratio (SFR), which requires banks to back long-term lending with funding that would not dry up in a crisis.
Cyrus Daruwala is the Managing Director for IDC Financial Insights, Asia/Pacific. He is responsible for growing the IDC Financial Insights footprint in Asia, their Research coverage as well as new the Advisory and Consulting business in the region. Cyrus brings with him more than 16 years of financial services experience and has a very close working relationship with most of the banks and financial institutions as well as vendors and service providers in the AP region.
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