Softer liquidity rules lift Europe's banks

LONDON Mon Jan 7, 2013 3:05pm EST

Illuminated signs light up at twilight outside the headquarters of the BNP Paribas bank in Paris January 30, 2012. REUTERS/Mal Langsdon

Illuminated signs light up at twilight outside the headquarters of the BNP Paribas bank in Paris January 30, 2012.

Credit: Reuters/Mal Langsdon

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LONDON (Reuters) - French and German bank shares rose on Monday after regulators softened draft rules aimed at preventing a Lehman Brothers-style collapse that critics said threatened to delay a European economic recovery.

Global regulators on Sunday gave banks four more years and greater flexibility to improve their funding positions, due to fears that an earlier plan for new liquidity rules would have made them reluctant to lend, particularly in Europe where credit conditions are already tough.

Europe's bank index .SX7P rose 1.1 percent to 172 points by 1600 GMT, after hitting 173.7, its highest in 17 months. France's Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA), Germany's Deutsche Bank (DBKGn.DE), Italy's Unicredit (CRDI.MI) and Britain's Barclays (BARC.L) all rose by more than 2 percent.

"This is a clear sign that regulators are adapting to the changing economic environment," said Carla Antunes-Silva, analyst at Credit Suisse.

Global financial regulators have tightened bank rules since the 2008 financial crisis and the liquidity coverage ratio (LCR) will be the first global liquidity standard when it comes into force from 2015. It aims to safeguard taxpayers by ensuring banks hold easily tradeable assets to keep them afloat if markets freeze up.

The pullback from an earlier draft at a meeting in Basel on Sunday went further than many analysts had expected.

The regulators decided to allow a wider pool of assets to count as highly liquid, including good quality corporate bonds, some equities and retail mortgage-backed securities (RMBS). They also changed their estimates for the outflow of deposits in a "stressed" situation and agreed that the standards will be phased in from 2015 and not fully implemented until 2019.

The changes could give a lift to earnings for banks across the board, with firms in a weaker funding position now under less strain to conform, and banks with better funding probably able to reduce their surplus liquidity and cut interest payments, analysts said.


European banks such as Societe Generale, Credit Agricole, Deutsche Bank and Commerzbank (CBKG.DE) risked having to build up bigger holdings of low-risk and low-yielding government bonds, so the relaxation in the planned rules should cut the increase in interest rates they face.

The cost of holding those extra assets could have run to tens of billions of euros for the industry.

"This is significant progress which addresses issues already raised by the European Commission," said EU Commissioner Michel Barnier.

The rules will be formally implemented under EU law in 2015, he said.

The French Banking Federation said the changes were a "step in the right direction" and should reduce constraints on banks' ability to lend. German and British bank groups welcomed the changes, particularly the expansion of assets that can be used.

The changes should also allow stronger banks to cut surplus liquidity they hold, allowing them to benefit from shifting from cash or governments bonds into assets that pay higher interest.

Barclays, for example, had a liquidity pool of 160 billion pounds ($257 billion) at the end of September, giving it an LCR of just below 100 percent under the proposed rules. Under the relaxed rules, 30 billion pounds of that could be considered surplus liquidity and release about 300 million pounds in annual interest costs, analysts at Espirito Santo estimated.

A liquidity rule could have prevented the short-term funding freeze that brought down lenders like U.S. investment bank Lehman Brothers and UK mortgage lender Northern Rock during the 2007-09 crisis.

But banks and some regulators had warned the original plan could spark another huge wave of deleveraging.

Banks are still restructuring and shrinking their balance sheets. Euro zone banks are two-thirds through their deleveraging process and are likely to shed another 132 billion euros of assets this year, Ernst & Young estimated on Monday, and regulators want to stop that retreat being too aggressive.

The liquidity rules will run alongside tougher capital rules - covering the amount banks have to hold to absorb losses - and could have forced banks to cut back on domestic lending.

The Basel Committee, made up of financial regulators from nearly 30 countries, said Sunday's changes mean the average LCR at the world's top 200 banks would rise to 125 percent from 105 percent under the old rules, putting it well above full compliance.

But there is wide range of liquidity across the banks.

If the original plan had been in force at the end of 2011, banks would have needed 1.8 trillion euros more liquidity, or about 3 percent of their assets, the Basel Committee estimated. Two-thirds of that shortfall would have been in Europe.

Some 38 percent of the banks would have had a ratio of below 75 percent - above the 60 percent level they now need to reach by 2015, but below the 100 percent standard set for 2019.

Analysts said major banks are likely to remain under pressure from investors to fully meet the rules by 2015, so the main winners of the longer time-frame will be smaller euro zone banks who were struggling to get cheap funding.

Widening the pool of assets should boost the market for RMBS and ease the pressure on banks to hold government bonds, after the euro zone crisis showed their risks to banks and sovereigns.

But the changes may have a muted impact on attempts to kick-start economic growth, as there remains scant appetite to take on debt, economists warned.

($1 = 0.6236 British pounds)

(Additional reporting by Simon Jessop, John O'Donnell, Edward Taylor, Francesca Landini and Christian Plumb; Editing by David Holmes and Anna Willard)

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Comments (2)
dareconomics wrote:
As the debt super cycle enters its final chapter, the world finds itself awash in debt. This debt pile is composed of public, private and financial sector obligations. In the U.S., households, companies and banks are far along the deleveraging process, but the federal government has increased its borrowing to compensate.

Europe has not really begun deleveraging. There has been very little change in private sector debt, government debt has actually increased and the banks have barely begun the process. A consulting firm claims that European banks have completed two-thirds of its deleveraging needs, but the chart above tells us something different. The truth is that European banks are stuffed to the rafters with questionable loans, which they cannot sell at sums close to their carry value. As such, deleveraging would wipe out their capital cushions.

The proposed capital and liquidity rules would have forced European banks to sell assets to raise cash for capital and liquidity buffers. Capital sales would have forced the banks to further curtail lending to both the private and public sectors. In that case, there would be no buyers left for the distressed sovereign debt of countries like Spain and Portugal, and no one to make loans for increased business activity.

Since the banks could not meet the new standards, the solution to the problem is to water them down. This has been accomplished in two ways. First, there will be a four year delay for the new Liquidity Cover Ratio (LCR) to take effect. Banks must meet 60% of their LCR need by 2015 with 100% funding delayed to 2019. Second, more assets will be deemed “liquid” for purposes of computing the LCR. Up to 15% of a bank’s LCR may be fulfilled by BBB- rated corporates. This change is a farce. During the last financial crisis, the only asset that remained liquid at reasonable market prices was sovereign debt, and this was prior to the eurocrisis.

The reason for the new rules is to create banks that are able to withstand crises. Since many banks could not meet these new standards, they are replaced by weaker ones. While this action will not strengthen the financial system, at least the banks may continue using leverage to keep struggling sovereigns afloat and keep nonperforming loans on their books at face value. The new rules may not fix anything, but they will allow the cover-up to continue.

Full chart with post at

Jan 07, 2013 5:35pm EST  --  Report as abuse
GeorgeLekatis wrote:
1. The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

2. During periods of stress it would be entirely appropriate for banks to use their stock of high quality liquid assets (HQLA), thereby falling below the minimum

3. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

4. European and American banking stocks surged because they will incur much reduced costs due to the implementation of the relaxed rules.

5. Banks in many other counties will have no benefit, as supervisors have already asked for strict liquidity rules, and they are not willing to take it back.

6. On the negative side, the main objective of Basel iii is to restore investor confidence. The Basel Committee has developed the new framework as a response to the crisis, and has explained (time and time again, every month since November 2010) the need for these strict rules.

Although it is true that Basel iii is an overreaction to the market crisis, it is way too late now to “ease” the rules and make investors happy the same time. This is simply a red flag for investors, leading to the conclusion that banks could not really comply. I have several telephone calls and shareholders ask the same question: What is wrong with the banks?

I agree with the Liquidity Coverage ratio (LCR) Basel iii amendment, but I cannot agree with the way it was presented.

George Lekatis
Basel iii Compliance Professionals Association (BiiiCPA)

Jan 07, 2013 6:31pm EST  --  Report as abuse
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