TOUGH new banking rules will be eased in an effort to stop red tape hitting lending and damaging the economic recovery, the world’s top regulators announced last night.
Banks will get more time to build up their liquidity buffers and can use a wider range of instruments, making it easier for them to hit the targets when state support is withdrawn.
The decision by the top oversight body of the Basel Committee on Banking Supervision represents a success for banking lobbyists, who feared the rules would squeeze banks hard when they are already weak in the wake of the crisis.
Under the new rules banks will have to build up a buffer of liquid assets to help them survive a downturn in the markets. This buffer should be big enough for the bank to meet all of its outgoings for a month under distressed conditions, without turning to central banks for help.
Regulators last night said banks will have until 2015 to create a buffer of at least 60 per cent of the required size, with that buffer increasing by an additional 10 percentage points per year until it reaches its full size in 2019.
That is a change from earlier plans which saw the full buffer coming into force in 2015, except for struggling banks which would have been given longer. Most banks already meet the target – but that is largely because of huge central bank support, which will be withdrawn in the coming years.
“Now banks are overflowing with liquid assets because the major central banks have expanded their balance sheets so much,” Sir Mervyn King explained. “There is a long period to adjust plans for liquid assets, a transition period for banks to find other liquid assets as we move back to a more normal world. There is a lot of work to do, but over a long period.”
He hopes that will avoid claims regulators are hurting lending – though Sir Mervyn noted the market may force banks to raise liquidity buffers anyway, having the same impact.
Banks will also be allowed to hold a wider range of assets in the buffer.
At least 60 per cent has to be held in instruments like central bank reserves and government debt. But the remainder can now be made up of lower quality assets, including up to 15 per cent from investment grade corporate bonds, equities and residential mortgage-backed securities.
Finance industry groups praised the new proposals. “Allowing banks to include a wider range of assets and giving them more time to phase the LCR (liquidity coverage ratio) in is a pragmatic response to the need to balance creating a safer financial system with enabling banks to support a robust economic recovery,” said Mark Bearman of the Association of Financial Markets in Europe.