Global Bank Regulators to Ease Rules

Tuesday, 06 Sep 2011 04:54 AM

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Global bank regulators are preparing to ease new rules that would require banks to increase their liquid asset holdings by 2015 in order to withstand a 30-day run on their funding.

“Regulatory focus is rapidly shifting from capital at risk to liquidity risk in our view,” Kian Abouhossein, European banks analyst at JPMorgan, told the Financial Times.

The new measure, known as the “liquidity coverage ratio”, will require banks to hold enough easy-to-sell assets to withstand a funding crunch like the one that bankrupted Lehman Brothers in 2008.

The Basel Committee on Banking Supervision, which sets global banking standards, agreed last year to make the liquidity rules “observational” from 2011 to 2015 to give regulators time to adjust details as needed.

That committee is now considering relaxing that ratio and is gathering data on its potential impact. The changes reportedly being considered would both reduce the amount of liquidity banks have to hold and allow them to count more corporate and covered bonds toward the required total.

A new report from JPMorgan estimates that, under the current liquidity ratio, 28 European banks had a total liquidity shortfall of $695 billion at the end of 2010 — and that liquidity requirements will cost European banks nearly 12 percent of their 2012 earnings.

World Bank President Robert Zoellick that current liquidity support measures being used by the European Union to stem the region's banking and sovereign debt crisis aren’t enough.

"They've tried to pump money into it, they've tried in the past month... the ECB bought a lot of bonds,” Zoellick told CNBC. “But I think dealing with these problems through liquidity measures will not be sufficient."

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