Banks around the world will have more leeway in meeting new rules
designed to prevent future financial crises, after a decision Sunday
by a group of top central bankers and regulators meeting in
Banks around the world will have more leeway in meeting new rules designed to prevent future financial crises, after a decision Sunday by a group of top central bankers and regulators who said they wanted to avoid restrictions that might damage the economic recovery.
Meeting in Basel, Switzerland, a committee that included Ben S. Bernanke, the chairman of the U.S. Federal Reserve, and Mario Draghi, the president of the European Central Bank, extended the transition period for the new rules, which are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008.
Besides extending the timetable, the panel -- which also includes top bank regulators from 26 large countries -- loosened the definition of what constitutes liquid assets. The decision takes some pressure off banks, which have complained that new guidelines will throttle lending and hurt economic growth.
Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. "Nobody set out to make it stronger or weaker," he said of the rules during a conference call with reporter, "but to make it more realistic."
Still, the decision, endorsed unanimously by participants, marked one of the first instances where the authors of the so-called Basel III rules have publicly conceded that the regulations could hurt growth if applied too rigorously.
"It's a signal they are responding to some of the concerns of the banks," said Harald Benink, a professor of banking and finance at Tilburg University in the Netherlands. He said the rules were stringent, and so adjustments were not necessarily a bad thing. But Mr. Benink said that he remains concerned that other key provisions of the Basel III rules are still not strict enough.
The rules are part of a new regime of banking regulations being drafted by the Basel Committee on Banking Supervision, named after the Swiss city where many of the discussions have taken place. The Basel rules are not binding on individual countries, but there is substantial international pressure for countries to comply.
The Basel Committee is overseen by the Group of Governors and Heads of Supervision, the organization that met Sunday.
Much of the debate so far has focused on increasing the amount of capital that banks hold in reserve to absorb losses, as part of a broad effort to make sure the world never has to endure another financial crisis like the one that has been under way since 2008.
The rules discussed Sunday are designed to address another weakness in the system -- one that was exposed in the days after Lehman's collapse in 2008. As trust among financial institutions evaporated and banks refused to lend to one another, many banks discovered that they did not have enough cash or readily salable assets to meet short-term obligations. In some cases, banks that were otherwise solvent faced collapse.
The rules require banks to have enough cash or liquid assets on hand to survive a 30-day crisis, like a run on deposits or a downgrade of their credit rating. They will take effect beginning Jan. 1, 2015, but be phased in more gradually than planned -- and will not take full effect until Jan. 1, 2019.
This so-called liquidity coverage ratio also defines what qualifies as liquid assets. For example, the assets cannot be ones already pledged as collateral. And they must be under control of a bank's central treasury, so it can act quickly to raise cash if needed.
On Sunday the central bankers and regulators broadened the definition of liquid assets. For example, banks will be allowed to use securities backed by mortgages to meet a portion of the requirement.
The vast majority of big banks already meet the requirements, but some do not, Mr. King said. The decision reduces pressure on those banks to hold more cash or buy high-quality government bonds to meet the rules on liquid assets.
"By having a gradual process, the banks that need to adjust will have enough time to make those adjustments," said Stefan Ingves, governor of the Swedish central bank, who is also chairman of the Basel Committee on Banking Supervision.
The panel said it was continuing to discuss another set of regulations designed to prevent banks from becoming overly dependent on short-term funding. But it did not announce any new decisions Sunday.
Before the Lehman bankruptcy, some institutions made long-term loans using money they borrowed for very short periods. While this practice -- known as maturity transformation -- is a normal part of banking, it can make a bank vulnerable to disruptions in the market if carried to extremes.
For example, Depfa, an Irish bank owned by Hypo Real Estate of Germany, issued long-term loans to governments using money it borrowed in short-term money markets. The bank made a profit from the difference between what it could charge for the long-term loans and what it paid to borrow short term. But after Lehman collapsed, Depfa was no longer able to borrow on international money markets to roll over its obligations. Its parent, Hypo Real Estate, required a taxpayer bailout to survive.
The new rules are aimed at preventing similar situations, by ensuring for example that banks have a variety of funding sources and are not overly dependent on one market or lender.
Although the Basel Committee drafts global banking rules, it is up to individual countries to write them into law. The United States has lagged behind countries including China, India and Saudi Arabia in putting the rules into force, according to an assessment by the Basel Committee in September. The U.S. delay has led to some grumbling from other members.
Bank industry representatives have argued that stricter capital and liquidity requirements increase the cost for banks to raise money, which they must pass on to customers. One of the most vocal critics of the new regulations is the Institute of International Finance in Washington, whose members include many large banks in the United States and Europe, like Goldman Sachs, Morgan Stanley and Deutsche Bank.
In October, the I.I.F. issued a report arguing that the liquidity coverage ratio and other new rules would make banks less willing to issue longer-term loans or hold debt issued by smaller companies, whose bonds usually have lower credit ratings. The rules would also penalize banks in emerging countries, the I.I.F. said, because they have less access to low-risk assets.
Proponents of the new rules argue that banks will be able to raise money more cheaply if they are perceived as being less vulnerable, offsetting the cost of implementing the new rules. They point out that American banks have generally recovered from the crisis more quickly than European banks because U.S. regulators forced them to raise new capital.
National regulators in European countries have been more hesitant to require banks to bolster their reserves, and many banks on the Continent are still struggling.
The Group of Governors and Heads of Supervision, the organization that met Sunday, is made up of the central bank chiefs and top regulators of the world's largest economies. The chairman is Mervyn A. King, governor of the Bank of England.
Countries represented on the committee are: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
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