French and German bank shares rose yesterday after regulators softened draft rules aimed at preventing a Lehman Brothers-style collapse that critics said threatened to delay a European economic recovery.
Global regulators on Sunday gave banks four more years and greater flexibility to improve funding positions, due to fears that an earlier plan for new liquidity rules would have made them reluctant to lend, particularly in Europe where credit conditions are already tough.
Europe’s bank index rose 1.1 per cent to 172 points yesterday afternoon, after hitting 173.7, its highest in 17 months.
France’s Société Générale and Crédit Agricole, Germany’s Deutsche Bank, Italy’s Unicredit and Britain’s Barclays all rose by more than 2 per cent. “This is a clear sign that regulators are adapting to the changing economic environment,” said Carla Antunes-Silva, analyst at Credit Suisse.
Global financial regulators have tightened bank rules since the 2008 financial crisis and the liquidity coverage ratio will be the first global liquidity standard when it comes into force from 2015. It aims to safeguard taxpayers by ensuring banks hold easily tradeable assets to keep them afloat if markets freeze up.
The pullback from an earlier draft at a meeting in Basel on Sunday went further than many analysts had expected.
The regulators decided to allow a wider pool of assets to count as highly liquid, including good-quality corporate bonds, some equities and retail-mortgage-backed securities.
They also changed their estimates for the outflow of deposits in a “stressed” situation and agreed that the standards will be phased in from 2015 and not fully implemented until 2019.
The changes could give a lift to earnings for banks across the board, with firms in a weaker funding position now under less strain to conform, and banks with better funding probably able to reduce their surplus liquidity and cut interest payments, analysts said.
‘Step in right direction’
The French Banking Federation said the changes were a “step in the right direction” and should reduce constraints on ability to lend. German and British bank groups welcomed the changes, particularly the expansion of assets that can be used.
A liquidity rule could have prevented the short-term funding freeze that brought down lenders such as US investment bank Lehman Brothers and UK mortgage lender Northern Rock during the 2007-2009 crisis. But banks and some regulators had warned the plan could spark more deleveraging.
Banks are still restructuring and shrinking their balance sheets. Euro-zone banks are two-thirds through their deleveraging process and are likely to shed another €132 billion of assets this year, Ernst Young estimated yesterday, and regulators want to stop that retreat being too aggressive.
The liquidity rules will run alongside tougher capital rules – covering the amount banks have to hold to absorb losses – and could have forced banks to cut back on domestic lending.
The Basel Committee, made up of financial regulators from nearly 30 countries, said Sunday’s changes mean the average liquidity ratio at the world’s top 200 banks would rise to 125 per cent from 105 per cent under the old rules, putting it well above full compliance. But there is a wide range of liquidity across the banks. If the original plan had been in force at the end of 2011, banks would have needed €1.8 trillion more liquidity, or about 3 per cent of their assets, the Basel Committee estimated. Two-thirds of that shortfall would have been in Europe.
Standard for 2019
Some 38 per cent of the banks would have had a ratio of below 75 per cent – above the 60 per cent level they now need to reach by 2015, but below the 100 per cent standard for 2019.
Analysts said major banks are likely to remain under pressure from investors to meet the rules by 2015, so the main winners of the longer time-frame will be smaller euro-zone banks who were struggling to get cheap funding. – (Reuters)
