Bloomberg News

Banks Can Breach Minimum Liquidity Rule in Crises, Basel Says

January 08, 2012

Jan. 8 (Bloomberg) -- Banks will be allowed to breach minimum Basel liquidity rules during financial crises so that they can avoid cash-flow difficulties, global financial regulators said.

“During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the Basel Committee on Banking Supervision’s governing board said in a statement on its website, following a meeting today in the Swiss city. Work on the main elements of the liquidity rule should be completed by the end of 2012, it said.

The aim of the measure, known as a liquidity coverage ratio, is to ensure that lenders hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement is set to enter into force in 2015.

Banks have argued that in its current form the liquidity rule may curtail loans by forcing them to hoard cash and buy government bonds. Bank watchdogs say the standard is needed to prevent a repeat 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. Global regulators said last year that they would amend the rule to address “any unintended consequences.”

Regulators must still clarify which assets banks should be allowed to count towards their liquidity buffers, and how much funding lenders should expect to lose in a crisis, the group said.

Separately, the governing board said that the Basel committee will carry out “detailed” peer reviews of whether nations have correctly implemented capital rules for lenders. The assessments will include whether lenders are correctly valuing their assets, it said.

--Editors: John Deane, Rachel Graham

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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