Global central bank chiefs gave lenders four more years to meetinternational liquidity requirements and watered down the measuresin a bid to stave off another credit crunch.

Banks won the delay to fully meet the so-called liquiditycoverage ratio, or LCR, following a deal struck by regulatorychiefs meeting yesterday in Basel, Switzerland. They'll be able topick from a longer list of approved assets including equities andsecuritized mortgage debt as they seek to build up buffers ofliquidity for use in a financial crisis.

“This was a compromise between competing views from around theworld,” Bank of England Governor Mervyn King said at a briefingfollowing yesterday's meeting. King chairs the Group of Governorsand Heads of Supervision, or GHOS, which decides on global bankrules. “For the first time in regulatory history we have a trulyglobal minimum standard for bank liquidity.”

Banks and top officials such as European Central Bank PresidentMario Draghi pushed for changes to the LCR, arguing that it wouldchoke interbank lending and make it harder for authorities toimplement monetary policies. Lenders have warned that the measuremight force them to cut back loans to businesses andhouseholds.

“The new liquidity standard will in no way hinder the ability ofthe global banking system to finance a global recovery,” King said.“It's a realistic approach. It certainly did not emanate from anattempt to weaken the standard.”

The Bloomberg Europe Banks and Financial Services Index rose asmuch as 2.1 percent with Italy's Banca Monte dei Paschi di SienaSpA leading gains at 19 percent. Deutsche Bank AG added as much as5 percent and both BNP Paribas SA and Barclays Plc were up 4percent.

“The loosening of liquidity rules has been long-signalled, andthus we wouldn't expect a huge rally, but we have been badlywrong-footed in the past,” Sandy Chen, bank analyst at CenkosSecurities in London, wrote in a note to clients.

The decision to relax liquidity rules for banks may boostpre-tax profit at Barclays by around 4 percent, according to AndrewLim, an analyst at Banco Espirito Santo SA.

U.K. banks such as Barclays, which have built up large reservesof high-quality liquid assets, will be among the biggestbeneficiaries of global regulators' decision to implement awatered-down version of the LCR, Lim said in a note to clients.

Credit Squeeze

Regulators at the Basel Committee on Banking Supervisionstruggled throughout 2012 to revise the LCR. After failing to reacha final deal last month, it was left to central bank and regulatorychiefs on the GHOS to make a final decision.

The LCR would force banks to hold enough easy-to-sell assets tosurvive a 30-day credit squeeze. It's a key component of a packageof capital and liquidity measures, known as Basel III, drawn up toavoid a repeat of the 2008 financial crisis.

Basel III has been subject to mounting criticism for itscomplexity, amid delays to its implementation in the European Unionand U.S.

The liquidity rule sets out a stress test that banks shouldapply to their books, assessing whether they would be able togenerate enough cash from asset sales to meet their regulatoryobligations.

A draft version of the measure was published by regulators in2010, on the basis that it would take effect on Jan. 1, 2015.

Under yesterday's deal, banks would only have to meet 60 percentof the LCR obligations by 2015, and the full rule would be phasedin annually through 2019, according to an e-mailed statement fromthe GHOS.

A sample of 209 banks assessed by the Basel committee had acollective shortfall of 1.8 trillion euros ($2.4 trillion) at theend of 2011 in the assets needed to meet the 2010 version of theLCR, according to figures published by the Basel group.

Banks had warned that the initial LCR proposal would force themto buy additional sovereign debt, more closely tying their fate togovernments' solvency. The 2010 rule was drafted before the EU wasfully confronted by a sovereign debt crisis that challengedtraditional assumptions about the creditworthiness of governmentbonds.

“GHOS has rescued the concept of a global liquidity rule, butits reality remains up in the air,” Karen Shaw Petrou, managingpartner of Washington-based Federal Financial Analytics Inc., saidin an e-mail. “Commitments were made by eurozone nations to complywith this agreement, but turning word into deed isn't going to beeasy.”

Sovereign Bonds

The latest LCR Rule retains the principal that allows banks touse sovereign debt to meet all of their LCR obligations, if thebonds are considered essentially risk free under international bankcapital rules. The EU and U.S. have been criticized byinternational regulators for misapplying parts of the capitalrules, allowing lenders to count more of the sovereign debt theyhold as risk free.

Under the 2010 plan, banks would have been allowed to use cashand government bonds to meet the LCR, subject to some rules on thequality of the sovereign debt. Lenders could also have usedhighly-rated corporate debt or covered bonds to meet 40 percent oftheir LCR requirements.

The deal expands the range of corporate debt that banks can use,allowing some lower rated securities to count. Banks would also beallowed to use some equities and highly rated residentialmortgage-backed securities.

“I suspect that some central banks will be greatly relieved thatthey will have more time to assess the impact of the new rules,”Richard Reid, a research fellow for finance and regulation at theUniversity of Dundee in Scotland, said in an e-mail.

“I'm also sure that many banks will also be happy to have gainedsome very significant concessions,” Reid said. “No doubt we willsee flexibility in the implementation of other regulatory measuresas we go through 2013.”

“The committee and the regulatory community more generally feltit was appropriate to broaden the class of liquid assets,” Kingsaid. “That doesn't mean to say it's a loosening of the wholeregime.”

The additional securities will get bigger write-downs to theirvalue than those that would have been eligible under the 2010 LCR.They also won't be allowed to count for more than 15 percent of abank's LCR buffer.

Supervisors will have discretion to decide whether the reserveslenders keep with central banks will count toward the LCR.Regulators will also continue to assess how the LCR will interactwith liquidity support measures provided by national central banks,the GHOS said.

Covered Bonds

“It became clear during the process of discussing all this thatit didn't make sense really to think about an LCR without having aclear view about what to make of access to central bankfacilities,” King said.

Central banks and regulators left the treatment of covered bondsin the LCR unchanged from 2010. Covered bonds are secured by assetssuch as mortgages or public-sector loans and are guaranteed by theissuer.

Authorities also agreed to water down parts of the stressscenario that banks will be pitted against to calculate whetherthey hold enough LCR assets. Still, they expanded the range ofrisks on derivatives trades that will be taken into account.

Regulatory chiefs said they will give additional guidance onwhen banks will be allowed to use their LCR buffers.

The GHOS brings together top officials from central banks andregulators in 27 nations including the U.S., U.K., China and Japan.It is the governing body of the Basel committee.

The Basel committee will also press ahead with reviewing anotherdraft liquidity rule included in Basel III. This measure, known asa net-stable funding ratio, requires banks to back long-termlending with funding that won't dry up in a crisis.

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