Bloomberg News

Basel Regulators Seek to Close Loopholes in Bank-Liquidity Rules

December 29, 2011

Dec. 22 (Bloomberg) -- Global regulators are targeting possible loopholes in draft rules to bolster banks’ liquidity as they push for agreement on parts of the standard by March, a member of the Basel Committee on Banking Supervision said.

Discussions are under way about what assets lenders should be allowed to count toward their minimum liquidity reserves and on how to prevent banks from using “regulatory arbitrage” to get around aspects of the measure, Sabine Lautenschlaeger, vice president of Germany’s central bank, said in a telephone interview this week.

Banks have argued that a draft of the so-called liquidity coverage ratio published last year may curtail loans by forcing them to hoard cash and buy up government bonds. Under the plans certain assets, such as covered bonds, would be allowed to account for a maximum of 40 percent of a bank’s total LCR buffer.

“There is a discussion going on with respect to the possibility of regulatory arbitrage” concerning the 40 percent cap, Lautenschlaeger said. “We decided that there needs to be more work done.”

Bank watchdogs say the liquidity requirements are needed to prevent a repeat of the collapses of Lehman Brothers Holdings Inc. and Dexia SA that were blamed in part on the lenders running out of short-term funding. The standard is scheduled to take effect in 2015.

Credit Squeeze

The Basel group’s LCR would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The ratio was discussed at a meeting of the Basel committee last week and some parts of the measure may be fine-tuned as soon as March, Lautenschlaeger said.

“We do have different market structures around the world and we are still on our way to defining certain liquid assets,” Lautenschlaeger said. “I think there will be some decisions made in March.”

The Basel committee’s work also includes examining the scenarios used by banks and regulators to calculate if funding reserves are adequate, she said.

The European Central Bank this week lent euro-area banks a record amount for three years and more than economists forecast in an effort to keep credit flowing to the economy during the sovereign debt crisis.

Banks will experience “very significant funding constraints” for the “whole” of 2012, ECB President Mario Draghi told the European Parliament this week.

--Editors: Peter Chapman, Patrick Henry

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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