19 June 2014

Bloomberg: Europe set to postpone decision on bank liquidity standards

The European Commission is looking into convening a meeting for its expert group in July to discuss liquidity rules, Steen Poulsen, head of section at the Danish Economy Ministry, said by phone. Talks may take place as late as September, according to Chantal Hughes, spokeswoman for Michel Barnier, the European Union’s financial services chief.

Europe is set to back legislation that sidesteps Basel III liquidity standards, according to the Danish government. That means banks in Europe may be free to hold 75 percent more in covered bonds than under Basel III and book the securities at a higher price relative to their market value than the global regulator had envisaged.

The delay from the commission, “Is because of the size of the legislation,” Christina Holm Eiberg, a spokeswoman for the economy ministry in Copenhagen, said. The ministry expects a decision to be reached in July or in the fall, she said. After that, the European Council and Parliament will have three months to hold a vote if there’s a motion to reject the commission’s decision.

Denmark, home to the world’s largest mortgage-backed covered bond market per capita, is confident that the commission’s final agreement will protect the Nordic nation’s interests, Poulsen said.

While Basel had assigned all covered bonds a so-called Level 2 status, limiting their use in banks’ liquidity buffers to 40 percent, the EU Commission is set to split the securities into two classes. Banks will be free to use Level 1 covered bonds to fill 70 percent of their liquidity buffers, booked at 93 percent of their market value.

Banks will also be required to sell a “representative sample” of their Level 1 covered bonds and Level 2 assets on “at least” a yearly basis to demonstrate liquidity and to “minimize the risk of sending a negative signal to the market as a result of the credit institution’s monetizing its assets during periods of stress,” according to the document. Institutions won’t be allowed to hold their own covered bonds in liquidity buffers, it said.

Basel says excessive covered bond use can lead to so-called asset encumbrance, as banks set aside less collateral to cover other creditors. The committee has also warned of the risk of interconnectedness that arises when banks hold securities issued by other lenders.

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