Global bank regulators are preparing to ease new rules that would require banks to hold more liquid assets to withstand a funding crunch in a crisis.
The move follows complaints from banks that the new Basel III standards on liquidity – the first international rules of their kind – would force them to sharply curtail lending to consumers and businesses.
The new measure, known as the “liquidity coverage ratio”, will require banks to hold enough easy-to-sell assets to withstand a 30-day run on their funding, similar to the crisis that engulfed Lehman Brothers in 2008. While the ratio does not formally take effect until 2015, banks were already struggling to amass enough cash and government bonds to meet the requirements, said analysts.
A new report by JPMorgan estimates that 28 European banks faced a total liquidity shortfall of €493 billion ($695 billion) at the end of 2010 under the ratio’s current framework. Only seven of the 28 banks tested met the enhanced standards, with the leading French banks – BNP Paribas, Société Générale and Crédit Agricole – among the least prepared, with a combined shortfall of €173 billion.
In fact, the JPMorgan analysis concludes that the liquidity coverage ratio is the most “painful” piece of regulation to hit the sector, and will cost European banks nearly 12 per cent of their 2012 earnings on average.
That compares with an expected 5 per cent hit from tougher global requirements on bank capital, and a 3 per cent reduction from the Dodd-Frank financial reform measures in the U.S..
“Regulatory focus is rapidly shifting from capital at risk to liquidity risk in our view,” said Kian Abouhossein, European banks analyst at JPMorgan.
A growing number of members on the Basel Committee on Banking Supervision, which sets the global standards, now want to soften key technical definitions in the ratio, people familiar with the discussions told the Financial Times. Those changes would have the effect of reducing how much liquidity banks have to hold, and would allow them to count more corporate and covered bonds toward the total, those people said.
The committee staff, based in Basel, Switzerland, are gathering data on the potential impact of the ratio, and a subgroup is working on the definitions ahead of a full committee meeting this month. US and continental European regulators are expected to push for changes that would ease the impact on their banks, while the UK, which pioneered the first national liquidity rules in 2009, is said to support the status quo. No changes to the ratio have been finalised, and discussions are continuing.
The Basel committee agreed last year to make the liquidity rules “observational” from 2011 to 2015 to give regulators time to tinker with the details.