The world's top banking regulatory body, the Basel Committee on Banking Supervision, has agreed to relax a global banking liquidity rule aimed at preventing future financial crises, reported AFP on Sunday, following two years of intense pressure from the banking industry, who complained that the new guidelines would hurt economic growth and throttle lending.
Sir Mervyn A. King, governor of the Bank of England and chairman of the committee’s oversight body, said on Sunday that there was no intention by the group to go easier on lenders, though the committee did agree to widen the definition of easy-to-sell assets, while pushing back implementation of the "liquidity coverage ratio" (LCR) rule by four years.
"Nobody set out to make it (the rules) stronger or weaker, but to make it more realistic,” said King, as cited by the Wall Street Journal, defending the watered-down rules.
"For the first time in regulatory history, we have a truly global minimum standard for bank liquidity… It's in the eye of the beholder as to whether these [changes] are material or not… Clearly one of the aims of this was to listen to the comments that people had made,” he said.
In the Basel Committee’s original proposal, drafted in 2010 after the market chaos that followed the collapse of Lehman Brothers, banks had to hold enough liquid assets —by 2015 and originally limited mostly to cash and government bonds—to be able to withstand an intense 30-day liquidity crisis similar to what occurred in fall 2008.
However at the end of 2011, the Basel Committee estimated that fewer than half of the world's top 200 banks were set to comply with the rule, while banks had also labelled the previous plan as too strict, given the still bubbling eurozone crisis and the continued struggle for an industry recovery.
As such, the new rules will not take full effect on Jan. 1, 2015, but will be phased in more gradually and not take full effect until Jan. 1, 2019.
"Importantly, introducing a phased timetable for the introduction of the LCR, and reaffirming that a bank's stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery," King told reporters.
Stefan Ingves, Sweden’s central banker and chairman of the committee, also hailed the updated liquidity rule as "quite an achievement and something that will be very, very helpful when it comes to ensuring global financial stability."
Ingves added that the global regulator would now turn their focus on the Net Stable Funding Ration, another pillar of the Basel III reforms.
"The completion of this work will allow the Basel Committee to turn its attention to refining the other component of the new global liquidity standards, the Net Stable Funding Ratio, which remains subject to an observation period ahead of its implementation in 2018," he said.