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What the world’s top regulators gave banks for Christmas

By Stephanie Gruner Buckley
baselPublished Last updated This article is more than 2 years old.

In a surprise move on Sunday, the Basel Committee on Banking Supervision unveiled relaxed rules on liquidity coverage ratios and the types of assets banks must hold as collateral, as well as extending the timeline for full implementation and enforcement. The changes should keep credit loose and limit bank exposure to sovereign debt, though questions remain on whether the new rules discourage the types of risky behavior that set off the global financial crisis in the first place.

Part of Basel III, the rules were drafted in 2010—prior to the full impact of the sovereign debt crisis—to make sure banks carry enough capital and liquidity to limit their exposure to risk. (A more detailed explanation of the committee and its work can be found here.) Whereas the original plan allowed only government bonds and “cash parked with central banks” to count as liquid assets required as buffers, according to the Wall Street Journal, the revised rules permit banks to hold a much wider range of assets, including certain equities, high-quality mortgage-backed securities and corporate bonds rated as low as BBB-. One sign of conservatism came in the rule concerning the average buffer for the world’s top 200 banks, which rose to 125% of their estimated monthly outflow, from 105%.

Overall, though, the decision marks a major triumph for global banking heads, who spent two years arguing that the original draft plan was too stringent (paywall). For instance, the stipulated increase in capital buffers would entail a pullback in lending, they said, hurting private-sector growth. Bank leaders also worried that, by limiting acceptable asset types that could be used as collateral to government bonds and cash, the rules would have pushed banks into buying sovereign debt, tying them more closely to the fates of debt-laden nations.

Bank of England Governor Mervyn King, who headed up the decision-making body responsible for global banking rules, called the deal “a compromise between competing views from around the world.” Noting that the new liquidity standard would help the global financial sector to support economic recovery, King also defended the new rules, saying that they “certainly did not emanate from an attempt to weaken the standard.”

Here’s what else banks got:

More time. Banks have until 2019, instead of 2015 to fully comply with the rules. Bank representatives had said they couldn’t meet the original deadline.

A phased in approach. Banks are only required to have 60% of their short-term funding in place by 2015, with 100% in 2019. The idea is to give banks more time to finance the global recovery.

Less stress. The new plan eases the “stress scenario”—meaning, the amount of liquid assets banks must hold to cover outflows for up to a month to prevent bailouts—for struggling banks, according to Mervyn King. Banks in countries under a great deal of stress, such as those in the euro zone, can draw down buffers below minimum levels if local supervisors agree, he said.

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