Source: Reuters

Global central bank chiefs gave lenders four more years to meet international liquidity requirements and watered down the measures in a bid to stave off another credit crunch. Banks won the delay to fully meet the so-called liquidity coverage ratio, or LCR, following a deal struck by regulatory chiefs meeting yesterday in Basel, Switzerland. They’ll be able to pick from a longer list of approved assets including equities and securitised mortgage debt as they seek to build up buffers of liquidity for use in a financial crisis. “This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said at a briefing following yesterday’s meeting. King chairs the Group of Governors and Heads of Supervision, or GHOS, which decides on global bank rules. “For the first time in regulatory history we have a truly global minimum standard for bank liquidity.” Banks and top officials such as European Central Bank President Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households. “The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.” Shares rise The Bloomberg Europe Banks and Financial Services Index rose as much as 2.1 per cent with Italy’s Banca Monte dei Paschi di Siena SpA leading gains at 19 per cent. Deutsche Bank AG added as much as five per cent and both BNP Paribas SA and Barclays Plc were up 4 per cent. “The loosening of liquidity rules has been long-signalled, and thus we wouldn’t expect a huge rally, but we have been badly wrong-footed in the past,” Sandy Chen, bank analyst at Cenkos Securities in London, wrote in a note to clients.

The decision to relax liquidity rules for banks may boost  pre-tax profit at Barclays by around four per cent, according to Andrew Lim, an analyst at Banco Espirito Santo SA. UK banks such as Barclays, which have built up large  reserves of high-quality liquidassets, will be among the biggest beneficiaries of global regulators’ decision to implement a watered-down version of the LCR, Lim said in a note to clients.

Credit squeeze Regulators at the Basel  Committee on Banking Supervision struggled throughout 2012 to revise the LCR.After failing to reach a final deal last month, it was left to central bank and regulatory chiefs on the GHOS to make a final decision. The LCR would force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. It’s a key component of a package of capital and liquidity measures, known

as Basel III, drawn up to avoid a repeat of the 2008 financial crisis. Basel III has been subject to mounting criticism for its complexity, amid delays to its implementation in the European Union and US. The liquidity rule sets out a stress test that banks should apply to their books, assessing whether they would be able to generate enough cash from asset sales to meet their regulatory obligations. A draft version of the measure

was published by regulators in 2010, on the basis that it would take effect on January 1, 2015.

BREATHER FOR BANKS

The Basel Committee has agreed to ease a new rule forcing banks to build cash buffers to protect against anymonth-long market squeeze. The Liquidity Coverage Ratio (LCR) rule is one of the world's

main regulatory responses to the financial crisis. Here's what the main changes are:

COMPLIANCE:Instead of full compliance in January 2015, banks will have to hold only 60 per cent of their buffer by then, rising 10 per cent annually thereafter to full compliance by January 2019

ELIGIBLE ASSETS: The list of assets eligible for inclusion is widened from highly rated government and corporate debt to include retail mortgage backed securities, lower rated corporate debt and

shares. New inclusions face a 25 to 50 per cent discount

BUFFER COMPOSITION:At least 60 per cent of the buffer must still be in highly-rated government debt and the newly eligible assets cannot count for more than 15 per cent of the overall buffer

SIZE OFBUFFER:The stress scenario a bank must use to determine the size of its buffer, aimed at keeping the bank funded for 30 days in a squeeze, is eased, meaning the overall buffer will be smaller

LIQUIDITY: Explicit acknowledgement that the liquidity buffer can be tapped to below minimum levels

in times of stress, even during the phase-in period, a provision aimed at helping banks in stressed

euro zone countries in particular