Bloomberg News

Basel Weighs Changes to Liquidity Rule Amid Credit Squeeze

December 13, 2011

(Adds detail on possible changes to the liquidity measure in 12th paragraph.)

Dec. 12 (Bloomberg) -- Global financial regulators meeting this week will seek to eradicate unintended consequences from their draft bank-liquidity standards to avert a threat to lending.

The Basel Committee on Banking Supervision will weigh changes to its proposed liquidity-coverage ratio, amid criticisms that it may stymie lending. Banks have argued that requiring them to hold enough easy to sell assets to survive a 30-day credit squeeze may curtail loans by forcing them to hoard cash and buy up government bonds.

“There’s a complete disconnect between the economic reality of what is highly liquid and what is allowed to count under the LCR,” Monika Mars, a PricewaterhouseCoopers AG director in Zurich, said in an interview.

Bank watchdogs are focusing on liquidity ratios to avoid a repeat performance of the collapses of Lehman Brothers Holdings Inc. and Dexia SA, which were blamed in part on the lenders running out of short-term funding. The European Central Bank last week agreed on an interest-rate cut and gave a pledge to offer unlimited cash for three years in an effort to bolster lenders’ access to funding.

Global regulators said last month that they would amend the LCR to address “any unintended consequences” of the standard.

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.”

Review Started

European Union regulators have “already started” to re- examine the LCR in parallel with the Basel committee, Enria said. The standard needs to be “carefully reviewed and calibrated.”

The Basel committee, which brings together regulators from 27 countries including the U.K, U.S. and China, meets on Dec. 13 and Dec. 14.

The committee “is now 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, Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S, said in an interview.

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

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

Market-Based Indicators

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 some assets can count toward banks’ liquidity buffers, Mars said. It is also looking again at assumptions on how much funding lenders would lose in a credit squeeze.

The Basel committee may amend the LCR to let banks use equities and more corporate debt to satisfy the rule, according to two people with direct knowledge of the plans, Bloomberg News reported last week. The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves.

European nations are split over the merits of the current version of the standard. Michel Barnier, the EU’s financial services chief, has asked regulators to examine how the liquidity rule should be adapted to the region’s banks. The U.K. has warned against a watering down of what was agreed by Basel.

“One reason why the U.K. has taken a stricter line on the liquidity coverage ratio compared to some other European countries is because the Bank of England has historically had very narrow rules for what counts as a highly liquid asset in its collateral rules, notably compared to the European Central Bank,” Berg said.

--Editors: Peter Chapman, Christopher Scinta

To contact the reporter on this story: Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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