Banks told they will not benefit from LCR delay

Bank liquidity experts say they have already been told by their national supervisors that they will not be allowed to relax compliance with Basel III’s liquidity coverage ratio (LCR), despite the new, staggered timeline agreed by senior supervisors and central bankers at a meeting on 6 January.

The hope among policy-makers was that phasing in the LCR would allow banks that have already built up the required liquidity buffers to shrink them again, therefore allowing more lending.

At the 6 January press conference announcing the wider changes to the LCR, Bank of England governor Mervyn King said: “It’s still possible the liquidity requirements… are in fact providing an incentive for banks to either deleverage or expand their lending by less than they would have otherwise done… it does not make sense to impose a requirement on banks that might damage the recovery.”

It is too late for that, says Arno Kratky, head of liquidity analytics at Commerzbank in Frankfurt. “In my view, this timeline change has come too late to make a difference for stronger banks. It would have been better if Basel had taken this approach in the very beginning, as they did for capital. The majority of banks have taken a conservative stance on liquidity and are already complying with the stricter rules – or are very close to that level. Investors and the market in general will already be judging banks by that standard, so it is unlikely that the industry will reduce compliance,” he says.

The LCR requires banks to hold enough liquid assets to cope with a 30-day period of funding stress. It was originally due to be introduced in 2015, from which point bank liquidity buffers would need to be big enough to cover at least 100% of funding needs over that period, as determined by regulator-set outflow assumptions. A study published last September by the European Banking Authority – using data from December 2011 – found an average LCR compliance level of 72% at the 44 large, internationally active banks in its sample. The oversight body of the Basel Committee on Banking Supervision has now voted to let banks hit a 60% compliance level initially, with the minimum increasing by 10% each year after that, reaching 100% in 2019.

But one asset and liability manager at a large European bank says he arrived at his desk on Monday morning – the day after the LCR announcement – to find an email from his national supervisor stating that the country’s implementation plan would not be changed. Another liquidity manager in a second European jurisdiction tells a similar story. And a source close to the committee, speaking to Risk earlier this week, has already noted that some national regulators will probably forbid banks to relax their compliance levels before 2015.

The LCR has been controversial since it first appeared in proposal form in December 2009, with early criticism focusing on the restrictive list of assets that would be allowed into the buffers – initially dominated by government bonds and cash. A second level of less-liquid assets, capped at 40% of the buffer and composed mainly of corporate bonds, was added later. The committee has now split this second group into two tiers – 2A and 2B. Residential mortgage-backed securities (RMBSs) and equities have been added to the 2B tier, and can make up no more than 15% of the overall buffer. To qualify, the RMBSs must be rated AA or higher, and the equities must be unencumbered. The assets will also be subject to a 25% and 50% haircut, respectively.

Another change sees lower-rated corporate bonds also allowed into level 2B of the buffer – one of many changes to the liquid asset buffer and the measure’s outflow expectations that were reported by Risk in advance last month. For example, the outflow rate assigned to committed liquidity facilities offered to non-financial corporates has been reduced from 100% to 30%, and the outflow for non-operational deposits provided by non-financial corporates, sovereigns and central banks has been cut from 75% to 40%.


This article was first published on Risk

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