Basel III to ease in new bank liquidity rules

Reuters | Oct 19, 2010 | 7:28pm IST

Global banking supervisors agreed on Tuesday to phase in the introduction of a key new global standard on lenders’ minimum short-term funding cover, handing further relief to a sector facing a hefty funding gap. The Basel Committee of banking supervisors and central bankers from 27 countries met on Tuesday in South Korea, which is hosting the Group of 20 leading countries that had called for tougher capital and liquidity requirements in response to the financial crisis.

Bank for International Settlements The committee had already agreed to a soft phase-in for its net stable funding ratio, which covers a bank’s longer-term liquidity. That measure will be tested from 2012 and become mandatory in January 2018. On Tuesday, the committee said it would also phase in over time its liquidity coverage ratio (LCR), which will require a bank to hold enough highly liquid assets to cover 30 days of net cash outflows. The LCR observation period will start next year and the rule will become a minimum global standard in January 2015.

"There are elements of these ratios which we will study during this observation period because these requirements are brand new – that’s the reason for this change," the Chairman of the Basel Committee on Banking Supervision Nout Wellink told a news conference in Seoul.


While a phase-in of the LCR had been expected, bankers welcomed confirmation of the delay. "The liquidity ratio and net stable funding ratio are some of the most difficult areas as international practices differ," said Pat Newberry, chair of the UK financial services practice at PWC. "Giving themselves time to look and think carefully has to be a sensible move. If you tighten up liquidity regimes, what does that do to lending volumes? It’s much more difficult to forecast than with capital," Newberry said.


Wellink said that the committee would also make a list of the banks judged "too-big-to-fail" by the end of the year. He said the Basel members would then decide how to make these banks better equipped to absorb losses by March 2011 and later draw up specific rules. "We will then come up with concrete proposals for them by mid next-year," he said.

Measures for so-called "too big to fail banks" are likely to include additional capital surcharges and bail-in debt proposals. The Basel Committee also said it would finalise by year-end its proposal on the use of contingent capital, also known as CoCos, bail-in bonds and other non-equity loss-absorbent instruments to pad out a bank’s capital requirements.


Many Asian banks have been holding on to excess capital due to the uncertainty over the Basel III norms. But maintaining too much capital is set to dilute return on equity of banks. "The banks will move quickly to put the capital to work. In some cases, you would see the dividend payout ratios going from 30 percent to 40 percent. But majority of Asian banks need capital to support the credit growth," one analyst with a foreign brokerage said.

Banking industry officials said that banks in Germany and France would welcome the phasing-in of the new liquidity standards. Britain’s Financial Services Authority has already proposed its own set of liquidity rules and now will come under pressure to align their introduction with the delayed Basel timetable to avoid market distortions. Industry officials also welcomed the review clause, which gives supervisors further wiggle room to delay the new rule if capital-raising conditions worsen or other problems emerge.


The liquidity rules are part of a wider Basel III package which G20 leaders are set to endorse in Seoul next month. The Basel Committee said it would publish a detailed text by year-end setting out all the elements of the new capital and liquidity requirements. Financial industry experts said this timetable signalled that Basel III was unlikely to undergo any further major changes.

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