Last updated: December 16, 2012 10:35 pm

US banks call for easing of Basel III

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US banks are making a last-minute push to ease new global liquidity requirements, arguing that they would need to come up with an additional $800bn in easy-to-sell assets under the proposed standards.

The banks argue that they have increased their holdings of liquid assets by $700bn – or about half the $1.5tn shortfall identified in the US at the end of 2010. Rather than raising the difference, they want to relax new Basel III bank safety rules.

“The US banking industry is significantly more liquid than it was even just two years ago,” said Bob Chakravorti, chief economist at the Clearing House, which represents the 11 largest US commercial banks.

“With certain recalibrations to the proposed Basel III requirement that are more reflective of market conditions, the industry would meet the proposed liquidity requirement and be well positioned to withstand a future financial shock.”

A report by the Clearing House, which will be released today, was shared with the Basel Committee on Banking Supervision before it met last week to discuss revisions to the global liquidity rule known as the liquidity coverage ratio. The standards must be approved by central bankers and supervision heads from the committee’s 27 member countries.

The LCR is aimed at making sure banks have enough funding and easily liquidated assets to survive a short-term market crisis that might include depositor runs and a lending freeze.

But the US banks argue that the definition of liquid assets is too narrow and that the assumptions of what could go wrong are too harsh. They warn that increasing liquidity requirements will reduce their lending capacity and profits.

At the end of last year, the European Banking Authority estimated a €1.13tn shortfall for its large and mid-sized banks under the proposed LCR, which the European Central Bank also wants to relax.

UK banks are generally in a much stronger position because Britain enacted the industry’s first liquidity rules in 2009. According to the Bank of England, the country’s top five banks already have 13 per cent more liquid assets than required and will be able to shrink their buffers if the proposed Basel standard is eased.

According to the Clearing House study, US banks had 81 per cent of the liquid assets they require as of July 2012, up from 59 per cent two years earlier because of increased holdings of government bonds and deposit growth. Citigroup on October 24 told fixed-income investors that it was “already comfortably in compliance” with an estimated LCR of 116 per cent as of September. Morgan Stanley said in August that its ratio “approaches 150 per cent”.

The Clearing House argues that easing the assumptions about how fast credit lines are drawn down, reducing the rate at which retail depositors could be expected to flee, and letting banks count more corporate and covered bonds toward their stock of liquid assets would combine to cut the industry shortfall in half.

The US Federal Reserve recently began carrying out its first system-wide stress test of liquidity to determine if US banks have sufficiently liquid balance sheets and proper risk-management procedures in case funding dries up.

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