Banks win victory over new Basel liquidity rules

Standards will be more relaxed than planned and also phased in over four years from 2015

The heads of the world's top regulators and central banks yesterday approved plans to require banks to hold significantly higher levels of liquid assets in order to reduce the chances of a repeat of the 2008-09 financial crisis. But in an apparent response to financial sector lobbying, they also relaxed the definition of what will be considered a liquid asset, and said banks will have four years longer than expected to implement the new standards.

The Group of Governors and Heads of Supervision (GHOS), meeting in the Swiss city of Basel, approved the Liquidity Coverage Ratio (LCR) put forward by the Basel Committee on Banking Supervision.

Sir Mervyn King, present chairman of the GHOS and outgoing Governor of the Bank of England, said: "The agreement reached today is a very significant achievement. For the first time in regulatory history, we have a truly global minimum standard for bank liquidity."

He added that the objective of building up liquidity buffers of easily saleable assets was to prevent commercial banks using central banks as a "lender of first resort" in times of financial stress.

During the 2008-09 financial crisis many banks found themselves shut out of wholesale money markets as investors panicked about the large amount of toxic subprime mortgage debt that institutions had accumulated. The Bank of England and the British Government were forced to offer liquidity support and capital injections into the UK financial sector peaking at £1 trillion. The US Federal Reserve and the European Central Bank also had to offer massive levels of support to American and European banking sectors in the crisis to prevent lenders collapsing as they too were shut out of global credit markets.

UK banks have complained that the requirement of the Financial Services Authority that they hold higher levels of liquid assets in the wake of the financial crisis has impeded their ability to lend to the British economy. This argument has been rejected by the FSA and the Bank. Nevertheless, the new Basel liquidity requirements will only be gradually phased in between 2015 and 2019, rather than by 2015 as initially proposed. And in its list of what regulators will consider to be "high quality liquid assets", the GHOS includes equities, lower-grade corporate bonds and some mortgage-backed securities, all of which will make the adjustment for banks easier.

The Basel Committee is also working on parallel plans to require banks to increase their capital buffers to enable them to cope with losses in financial crises without going bust. The committee has indicated that it will require banks to hold a minimum capital buffer of 3 per cent of their total assets by 2019. But some regulators have criticised this target as being insufficient. Thomas Hoenig of America's Federal Deposit Insurance Corporation has pointed out that US banks were holding roughly this level of capital before the crisis and still required large amounts of new equity to remain solvent.

Further, Andy Haldane, the Bank of England's executive director of financial stability, has criticised the Basel Committee for proposing to allow banks to use complex and opaque "risk weights" to determine how much capital they need to hold against their assets.

The GHOS also endorsed a new written charter for the Basel Committee, which it said would enhance the transparency of efforts to achieve global co-ordination of banking supervision and regulation.