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Banks win more flexible liquidity rules from Basel Basel liquidity agreement boosts bank shares
(about 2 hours later)
International financial regulators have eased rules on minimum quantities of cash and liquid assets all banks must hold, set to take effect in 2015. European bank shares have risen following the weekend agreement on the minimum amounts of cash and easy-to-sell assets that banks have to hold.
href="http://www.bis.org/press/p130106.htm" >The agreement, by the body that oversees the Basel Committee on Banking Supervision, is an attempt to make banks less vulnerable to runs. A previous draft two years ago said they would have to meet new requirements by 2015, but that has now been extended to 2019.
The new "liquidity coverage ratio" will be phased in from 2015 and take full effect four years later. The reserves are supposed to make banks less vulnerable to lots of customers trying to withdraw their money.
Analysts say the rules just announced are more flexible than a draft version. It is the first time there have been liquidity rules covering global banks.
The new rules are part of efforts to ensure banks survive financial shocks such as those around the times of the 2007 run on Northern Rock in the UK, or by the 2008 collapse of Lehman Brothers in the US. href="http://www.bis.org/press/p130106.htm" >The agreement was made by the group of banking regulators that oversees the Basel Committee on Banking Supervision.
Banks will have to hold enough cash and easily sellable assets to tide them over during a 30-day crisis.
The final version of the rules updates a draft version put forward more than two years ago.
Perhaps the most striking characteristics of today's agreement - which amends a draft first published in 2010 - is that banks will be allowed to include corporate bonds, some shares and high-quality residential mortgage backed securities in their permitted stocks of liquid assets.
This goes against the grain of central banking and regulatory orthodoxy. In particular, the inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007.
The same group is also trying to set minimum capital requirements, which would make banks more able to absorb losses.
Analysts say the rules just announced are more flexible than a draft version, and shares in banks rose on Monday morning.
Barclays shares rose 3.4% in early trading in London, while Lloyds Banking Group was up 1.2%. In Frankfurt, Deutsche Bank was up 3.2% while Commerzbank rose 2.2%.
Odd selection?
Under the new rules, banks will have to hold enough cash and easy-to-sell assets to tide them over during a 30-day crisis.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
Regulators hope that extra liquidity would allow banks to survive a run on them, as happened with Northern Rock in 2007.
One big change has been which assets count as easy to sell.
Some company shares, corporate bonds and residential mortgages have been added to the list, which previously only included assets such as government bonds.
"The inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007," said BBC business editor Robert Peston.
The new liquidity coverage ratio will be phased in from 2015 and take full effect four years later.
Banks had warned that over-stringent standards could reduce lending and stifle economic growth.Banks had warned that over-stringent standards could reduce lending and stifle economic growth.
The new version allows banks to hold a broader range of eligible assets, including some shares, corporate bonds, and high-quality residential mortgage-backed securities. Bank of England governor Sir Mervyn King, who also chairs the group of regulators from 27 countries that agreed the deal, said that the phased introduction would mean the new standards would not "hinder the ability of the global banking system to finance a recovery".
It also gives them more time to comply with the new standards.
The oversight body's head, Mervyn King, said the timeframe ensures the rules "will in no way hinder the ability of the global banking system to finance the recovery".
BBC business editor Robert Peston said the oddity was that most banks currently hold considerably more than the new minimum requirement, because leading central banks have injected massive amounts of liquidity into the financial system through quantitative easing.
But this simply reflects the depressed times we live in, our correspondent said.
The new rules would force banks to hold vastly more liquid assets than they did in 2007 when some big banks barely had enough cash to meet demands for repayment from relatively small numbers of depositors and creditors, he added.
They are part of the broader Basel III package of reforms, which will require lenders to set aside more capital to absorb losses.
The Basel Committee brings together representatives of regulators from 27 nations.