The Basel Committee of banking supervisors, representing most of the world's capital markets, surprised banks on Sunday with concessions on a planned new liquidity rule so they can withstand market squeezes. Banks and some regulators said the original draft, the first of its kind, was too draconian, tying up vast pools of liquidity at a time when credit is needed to aid struggling economies.
Basel is giving banks an extra four years to comply with the rule by 2019 and include a wider range of risky assets in the buffer but Bank of England Governor Mervyn King said on Sunday a strong disincentive will be built into the changes. Banks will have to set aside more capital if they choose to pad out their liquidity buffer with the riskier assets such as bonds backed by home loans, or shares.
The liquidity rule is experimental in some ways, seeking to plug a gap that left banks such as Northern Rock in Britain with too little cash as a result of the credit crunch that emerged in 2007, forcing taxpayers to foot the bill. It is part of the Basel III framework approved by world leaders in 2010 that also forces banks from this month to hold up to three times more basic capital than before the crisis.
Only 11 of the G20 countries met this month's deadline for implementing Basel III, with the United States and European Union failing to get their rules in place. Negotiations on an EU law to implement Basel III resume on Thursday and some lawmakers want to dilute the liquidity rule further than Basel has done by allowing banks to include any asset central banks accept as collateral.
Sharon Bowles, the UK Liberal Democrat chair of the European Parliament's economic affairs committee, welcomed a wider range of assets in the buffer - up to a point. "With regard to assets that qualify as central bank eligible assets it would clearly be wrong to frame that so widely that we ended up with 'anything goes' under emergency or special treatment rules", Bowles said.
Banks lobbied hard against the Basel rules that will force them to hold more capital, up to 9.5 per cent in the core mandatory buffers for the world's top 28 lenders by 2019. But market and supervisory pressure has meant that most big banks meet or exceed the Basel levels they must reach by 2019. "It will be the same for liquidity and banks will want to be able to advertise that they are stronger than the regulators need them to be, which leaves those who can't looking like the weaker brethren", said Graham Bishop, a former banker who advises the EU on regulation.
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