Basel May Ease Bank Liquidity Rules

The Basel Committee on Banking Supervision will weigh changes to its proposed liquidity-coverage ratio this week in an effort to eradicate unintended consequences that could threaten to dry up lending.

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Banks have argued that requiring them to hold enough liquid assets to survive a 30-day credit squeeze may curtail loans by forcing them to hoard cash and buy up government bonds.

Andrea Enria, chairman of the European Banking Authority, warned last week that “the interbank market has been shrinking and is increasingly segmented” with banks “limiting themselves to transactions with domestic peers and at shorter maturities.”

Last month, global regulators said they would amend the LCR to address “any unintended consequences” of the standard. European Union regulators have “already started” to reexamine the LCR in parallel with the Basel committee, said Enria. The standard needs to be “carefully reviewed and calibrated.”

The Basel committee, comprised of regulators from 27 countries, including the U.S., U.K., and China, meets on December 13 and 14. It will be “looking at a much wider definition of what can count as a highly liquid asset,” compared with a draft version of the rule published last year, said Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S.

Regulators need to “move towards criteria for the LCR that make more sense, also in light of the government debt crisis,” Berg said.

In September, the Basel group said it would “accelerate” this work in response to a request from the Group of 20 to give markets certainty on the rules as soon as possible. Final changes to the LCR will be made next year, it said.

The committee is “looking at more market-based indicators for defining highly liquid assets” as well as “revisiting” a cap it imposed on how much certain assets can count toward banks’ liquidity buffers, said Monika Mars, a PricewaterhouseCoopers AG director in Zurich. It will also look at how much funding lenders stand to lose in a credit squeeze.

The Basel group may amend the rules to allow banks to use equities and more corporate debt to satisfy their capital requirements. However, such a move would reduce demand for European government securities, making it harder for already struggling euro nations to fund themselves.

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