Regulators Ease Bank Liquidity Rule

Central bankers give lenders four more years to comply; add to list of approved assets.

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

Banks won the delay to fully meet the so-called liquidity coverage ratio, or LCR, following a deal struck by regulatory chiefs meeting yesterday in Basel, Switzerland. They’ll be able to pick from a longer list of approved assets including equities and securitized mortgage debt as they seek to build up buffers of liquidity for use in a financial crisis.

Credit Squeeze

Regulators at the Basel Committee on Banking Supervision struggled throughout 2012 to revise the LCR. After failing to reach a final deal last month, it was left to central bank and regulatory chiefs on the GHOS to make a final decision.

Sovereign Bonds

The latest LCR Rule retains the principal that allows banks to use sovereign debt to meet all of their LCR obligations, if the bonds are considered essentially risk free under international bank capital rules. The EU and U.S. have been criticized by international regulators for misapplying parts of the capital rules, allowing lenders to count more of the sovereign debt they hold as risk free.

Covered Bonds

“It became clear during the process of discussing all this that it didn’t make sense really to think about an LCR without having a clear view about what to make of access to central bank facilities,” King said.

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