International financial regulators have given banks more time to build up cash buffers so they can divert some of their reserves to help struggling economies grow.
The banks won the more flexible rules on minimum quantities of cash and liquid assets from the Basel Committee on Banking Supervision, which agreed yesterday to phase in its proposed regime on the assets over a four-year period from 2015.
It also widened the range of assets banks can put in the buffer to include shares and mortgage-backed securities.
The changes could be beneficial for Irish banks which are in the process of rebuilding their balance sheets after the 2008 crash which saw all of them bar Bank of Ireland nationalised. The need to preserve capital to meet the Basel rule changes and the European Central Bank stress tests is one of the factors constraining lending by Irish banks.
Rigorous standards
“The department will review the Basel Committee’s decision. However, the Central Bank has already set rigorous capital standards for the Irish banks, which is significantly in excess of the standards in the majority of EU countries,” a Department of Finance spokesman said last night.
International banks had complained they could not meet the original January 2015 deadline to comply with the rule on minimum holdings of easily sellable assets and, at the same time, supply credit to businesses and consumers.
“For the first time in regulatory history, we have a truly global minimum standard for bank liquidity,” the oversight body’s chairman, Mervyn King, told a news conference in Basel, Switzerland.
“Importantly, introducing a phased timetable for the introduction of the liquidity coverage ratio . . . will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery,” said Mr King, also Bank of England governor.
The rule requires banks to hold enough liquid assets such as government and corporate bonds to cover net outflows for up to a month to avoid taxpayers having to bail them out. The Basel Committee agreed to ease the “stress scenario” for calculating the liquid assets banks must hold, meaning the buffer would be smaller.
Under the Basel regime, the rules would run alongside separate rules governing banks’ capital, intended to ensure their longer-term stability.
Banks would start complying in 2015 when they are expected to hold at least 60 per cent of the total buffer, building up to 100 per cent by January 2019, when Basel’s separate, tougher bank capital requirements must be met in full. The liquidity rule is meant to avoid a repeat of how a short-term funding freeze brought down lenders like Britain’s Northern Rock early on in the 2007-2009 financial crisis.
Safer banks
It is part of the Basel III bank capital and liquidity accord agreed by world leaders in 2010 and being phased in over six years from this month, though there are delays in the US and EU. Regulators have been trying to settle on a plan to make banks safer by bolstering capital without jeopardising growth by making them restrict lending.
Central Bank deputy governor Matthew Elderfield said in November, with the “end point” clear, banks should set out plans to comply with Baselon capital requirements, “so the size of the task is very transparent” to regulators.
Bank of Ireland and AIB both indicated they were assessing the impact on their capital ratios from the phased transition to the Basel III capital framework. Emer Lang, a banking analyst for Davy Research, wrote in the stockbroker’s 2013 outlook last week, that Davy expected the banks to begin to report “fully loaded” Basel III ratios this year.
Many banks are well below full compliance, especially in some euro zone countries. – (Reuters)
