Bowing to two years of intense pressure from the banking industry, the Basel Committee on Banking Supervision -- a group of the world's top regulators and central bankers -- said Sunday that lenders can pick from an expanded list of assets to meet the proposed “liquidity coverage ratio,” or LCR. The panel also agreed to delay full implementation of the rule until 2019.
“This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said in a statement. King chairs the Group of Governors and Heads of Supervision, or GHOS, which decides on global bank rules. “For the first time in regulatory history, we have a truly global minimum standard for bank liquidity.”
Aimed at preventing a repeat of the 2008 bank collapses, the rules are designed to ensure that banks have sufficient ready assets to weather a 30-day financial crisis, similar to what occurred in fall 2008.
But it remains to be seen if the concessions will strike the right balance between preventing banks from becoming dangerously fragile and providing the industry enough flexibility needed and not have them tied up in meeting the new global banking guidelines, dubbed Basel III.
Regulators argue that the new regulations, while weaker than originally envisioned, nonetheless make banking rules much stronger than they were before the crisis. “The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”
The final version of the LCR was significantly less onerous than the draft put forward more than two years ago.
The biggest changes to the rule involve what banks are allowed to count as "high-quality liquid assets." The Basel Committee in 2010 drafted the rule narrowly, including government bonds, cash parked at central banks and little else. Regulators ultimately agreed to count some equities, corporate bonds rated as low as BBB- and top-quality mortgage-backed securities up to 15 percent of the requirements, albeit at a potential 25 percent to 50 percent discount.
The calculation methods have also been changed in ways that will significantly reduce the total size of the liquidity buffers many institutions needed.
Stefan Ingves, the Swedish central banker who chairs the Basel Committee itself, said Sunday's changes mean that the average buffer at the world's top 200 banks rises from 105 percent to 125 percent, putting it well above full compliance.
A sample of 209 banks assessed by the Basel committee had a collective shortfall of 1.8 trillion euros ($2.35 trillion) at the end of 2011 in the assets needed to meet the 2010 version of the LCR, according to figures published by the Basel group.
Banks shares rallied, with French lenders BNP Paribas SA (EPA: BNP) and Credit Agricole SA (EPA: ACA) gaining 2.1 percent and 3.4 percent, respectively. There were similar gains in Britain’s Barclays PLC (LON: BARC), Italy’s UniCredit SpA (BIT: UCG), Germany’s Deutsche Bank AG (ETR: DBK) and Hong Kong-listed shares of HSBC Holdings plc (HKG: 0005).
While the banks applauded the changes, the wider impact should be muted, said Chief Global Economist Julian Jessop of Capital Economics in London.
"Most of the large (and therefore systemically important) banks already meet the LCR as originally proposed," he said. "There may still be some smaller banks that would have struggled to do so by 2015, but it was always likely that they would have been given more time."
A wide range of studies (including by the BIS, IMF and OECD) has suggested that the quantifiable macroeconomic impact of implementing the original Basel III proposals in full would have been small, lowering gross domestic product growth by perhaps 0.1 percentage points to 0.2 percentage points a year.
The main negative impact would come from the increase in funding costs due to higher capital requirements, which will go ahead as planned. Against this, there is the harder-to-quantify economic benefit from a more robust banking sector and reduced vulnerability to shocks, according to Jessop.
“Overall, though, small tweaks to the new regime are unlikely to have a significant impact on the outlook for bank lending or economic growth,” Jessop said.