Risk Annual Summit: Basel ‘caved in’ on LCR, says German regulator

A combination of national and industry concerns was behind the controversial watering down of Basel III’s liquidity coverage ratio (LCR) in January, according to Ulrich Giebel, a liquidity policy expert at the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Germany’s prudential supervisory agency.

The Basel Committee on Banking Supervision “caved in to some pressure that came from countries as well as from the industry,” said Giebel, speaking at the Risk Annual Summit in London.

It was a controversial move. Although the committee’s oversight body, which is chaired by the Bank of England governor, Mervyn King, cited fears that the LCR could have hurt economic recovery when it endorsed a series of tweaks on January 6, critics claimed regulators were simply pandering to bank lobbyists.  

Bafin’s Giebel argued the pressure was broader than that, but whatever the motivation, the changes have certainly made it easier to comply. According to Giebel, an internal study conducted in the middle of last year by the Basel Committee showed that, among 200 participating banks, average LCR compliance was 101% when using the original 2010 rules – the ratio requires banks to be at least 100% compliant. When the same data was run through the revised LCR, average compliance jumped to 127%.

Originally due for implementation in 2015, the LCR requires banks to hold enough highly liquid assets to cover expected outflows during a 30-day period of stress. The list of eligible liquid assets in the committee’s first draft of the measure in 2010 – which focused on cash and government bonds – was widely deemed to be too narrow. Since then, incremental changes have been made to this list and the regulator-set outflow expectations.

In January’s changes, some stocks and residential mortgage-backed securities were added to the liquid asset list, albeit with significant haircuts, along with a further relaxation of the outflow rates of some liquidity facilities and commercial deposits. The implementation timetable was also altered – banks will now only have to reach 60% compliance by 2015, with an extra 10% added in each subsequent year until the full 100% is achieved by 2019.

But while compliance might be easier, banks may not be able to benefit from the phase-in arrangements. Regulators from a number of European countries have already made it clear banks that are already compliant will not be allowed to drop below 60% before the 2015 phase-in, despite this being permitted on paper.

Several bank analysts have also made it clear that the market will punish any institution deemed to be lagging.

The future of the LCR now seems set in stone, but the same cannot be said for its bigger brother, the net stable funding ratio (NSFR). Scheduled to be implemented from 2018, the NSFR is designed to deal with longer-term structural liquidity mismatches by setting a minimum acceptable amount of stable funding based on the liquidity characteristics of a bank’s assets and activities over a one-year horizon. Critics claim it contains several serious structural flaws, and Giebel said the Basel Committee will be addressing these in a recalibration at the end of 2013 or the beginning of 2014.


This article was first published on Risk

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