January 7, 2013 6:14 pm

Basel tries fluid position on liquidity

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Since the financial crisis, banking regulators have given relatively short shrift to complaints from the sector that new rules are too tight and could harm profitability.

It was therefore all the more unusual when the Basel Committee on Banking Supervision said on Sunday that it was softening the first-ever global liquidity requirements and delaying their full implementation until 2019.

But regulators did not give in to the bankers’ demands indiscriminately. The changes were focused on making sure that forcing banks to build up their liquidity stocks did not discourage lending to the real economy.

The big winners among the banks are those that still need to build up their liquidity and those that have big commercial lending businesses that will benefit from changes to the way the rules are calculated for corporate lines of credit and corporate deposits.

European bank shares, particularly for French and German banks that were expected to struggle to meet the tighter draft rules by the old 2015 deadline, immediately jumped, rising between 2 and 5 per cent.

Carsten Brzeski, economist at ING, called it a “shortlived and temporary relief rally” in response to watered-down rules which revealed regulators were cognisant of the tough environment banks faced. “Regulators don’t want to choke off the recovery by overburdening the banks,” he said.

Shares in the UK and Swiss banks with big wholesale businesses also rose, probably in hope that regulators there would soften their existing local liquidity rules to match the Basel changes. The UK has already promised to move gradually to the global rules, while Swiss regulator Finma said on Monday it would not change its requirements for big banks “for the time being”.

All big banks are expected to see slightly increased profitability from the rule changes but they will have less impact on Asian and Nordic banks or on the pure-play US investment banks, which were all generally on track to meet the tighter draft requirements.

The Basel announcement reflected a growing sense in the regulatory community that for once the bankers were not exaggerating and that cracking down too hard and too quickly could genuinely undermine the chances for economic growth.

Analysts said the draft liquidity rules were always more likely to change than the capital rules approved two years ago. The Basel group has been regulating capital for two decades but the new “liquidity coverage ratio” was an experiment, with calculations based on estimated needs rather than solid experience.

The bleak European economic picture and the eurozone sovereign debt crisis added weight to the bankers’ arguments, as representatives of the European Central Bank and European Committee both took up the banks’ cause in talks.

By autumn even the UK, which is considered a hardline supporter of liquidity regulation, was having doubts. UK regulators announced a softening of their first-in-the-world national liquidity rules in late September and Sir Mervyn King, the UK central banker who also heads the Basel oversight body, spoke publicly of the need to make sure the rules did not hinder economic recovery.

“This latest move shows how it is practically impossible to reform the global financial sector when you have such divergent interests among politicians, regulators, and bankers of the Basel committee member countries,” said Mayra Rodriguez Valladares, a regulatory consultant.

In the end, the Basel committee gave weaker banks an additional four years to meet the deadlines so they would feel less pressure to pull back on lending, widened the definition of liquidity to allow banks to use some higher-yielding assets, and changed the calculation of the liquidity requirements, known as the run-off rates, for some corporate and retail business lines.

Both the British Bankers' Association and the Global Financial Markets Association praised the decision to allow banks to use some equities and mortgage-backed securities in their liquidity buffers. Analysts said the shift could help stimulate demand in both markets, particularly in Europe.

But the association representing all of Germany’s banks complained the changes did not go far enough because banks will still have to use sovereign bonds and central bank reserves for at least 60 per cent of their liquidity buffers

“In the light of the current situation in Europe it is difficult to understand the bias towards sovereign bonds,” the group said.

US and European bankers generally agreed that the rule changes affecting run-off rates were the most significant. The Clearing House, which represents global banks that do business in the US, had specifically lobbied for easing the requirements for retail and corporate deposits as well as committed credit lines to non-financial companies.

Monte dei Paschi di Siena, Italy’s third-largest bank by assets, was the single biggest beneficiary of the Basel rule change. Its shares were up as much as 12 per cent in early-morning trading and finished nearly 7 per cent higher on expectations that the rule changes would help it avoid a taxpayer bailout.

In an interview with Roman newspaper Il Messaggero published on Monday, Fabrizio Viola, chief executive, reiterated that the bank would make “every effort” to return to profitability.

Additional reporting by James Shotter in Zurich, James Wilson in Frankfurt, Richard Milne in Oslo, Alexandra Stevenson in London and Rachel Sanderson in Milan

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