Markets lap up easing of bank liquidity rules

Tim Wallace
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shares jumped yesterday after regulators eased incoming liquidity rules, giving banks more time to build up their buffers as well as letting lenders use a wider range of instruments.

The aim of the rules is to make sure banks have a buffer of liquid assets big enough to match outflows of cash in a month-long stressed position.

Initially, they were meant to come in in 2015, but the authorities feared that could be too rapid, forcing banks to raise buffers at the expense of lending and so harming the economy.

Now the rules will be phased in from 2015 to 2019.

Barclays, RBS and Lloyds all saw their shares jump sharply – Barclays led the field with a 3.79 per cent rise.

The banks declined to comment, but a source at a major lender said the change was a very positive step.

“Banks have been pulled in several different directions by regulators, and it is good that they have recognised the need for growth,” the source said.

Yesterday the Basel Committee on Banking Supervision gave more details on the instruments allowed towards the buffer – including the retail mortgage backed securities (RMBS) which will be allowed to make up below 15 per cent.

They must not be issued by the bank itself; must have a double-A rating or better; must be traded in large, deep and active repo or cash markets; have a track record of liquidity in markets even under stressed conditions; and be based on residential mortgages and contain no structured products; the owner of the underlying mortgages must be liable for any shortfall in sales proceeds from the property in the event of a foreclosure; and the issuer must retain a stake in the assets they securitise. Similar conditions are applied to the new equity and corporate debt securities now eligible.

But despite the tough constraints bankers praised the move to allow RMBS into the buffer, both because it gives another source of liquidity and because it creates more uses for RBMS and so stimulates the market.

The authorities also said the buffer must be regularly tested, selling or repoing assets to make sure they as liquid and valuable as expected.